# In defense of dividend paying stocks



## Pluto (Sep 12, 2013)

http://www.marketwatch.com/story/di...-the-returns-of-the-sp-500-in-2016-2016-09-06

Double the return of S&P index.


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## My Own Advisor (Sep 24, 2012)

Pluto said:


> http://www.marketwatch.com/story/di...-the-returns-of-the-sp-500-in-2016-2016-09-06
> 
> Double the return of S&P index.


Thanks for the link.


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## james4beach (Nov 15, 2012)

Those are great results, and clearly it's been a good year. At the same time I think dividend investors should keep in mind that central bank zero interest rate policy (ZIRP) may have changed some of the factors around "traditional" dividend investing. That is, ZIRP may have chased some excess money into dividend stocks over the last few years in the hunt for yield.


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## My Own Advisor (Sep 24, 2012)

james4beach said:


> Those are great results, and clearly it's been a good year. At the same time I think dividend investors should keep in mind that central bank zero interest rate policy (ZIRP) may have changed some of the factors around "traditional" dividend investing. That is, ZIRP may have chased some excess money into dividend stocks over the last few years in the hunt for yield.


Not just last year....

Index	Total return - Average total return - 20 years
S&P Dividend Aristocrats = 11.2%
S&P 500 = 8.2%

Future performance - who knows!!??


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## mordko (Jan 23, 2016)

How about 50 years? Because over various 20-year periods one generally gets different results. You can easily find a 20-year period when bonds outperformed stocks (e.g. 60s-70s) but its not the case over most 20-year periods. 

In a way, one can argue that "Dividend Aristocrats" is a proxy for value and quality which are the two factors that have enhanced return long-term. Then again, dividends are the current fad, not to mention that investors are using such stocks as a substitute for bonds which pay no income. Hence the current run up. Inevitably it reduces long-term expectations from the current levels.


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## Market Lost (Jul 27, 2016)

mordko said:


> How about 50 years? Because over various 20-year periods one generally gets different results. You can easily find a 20-year period when bonds outperformed stocks (e.g. 60s-70s) but its not the case over most 20-year periods.
> 
> In a way, one can argue that "Dividend Aristocrats" is a proxy for value and quality which are the two factors that have enhanced return long-term. Then again, dividends are the current fad, not to mention that investors are using such stocks as a substitute for bonds which pay no income. Hence the current run up. Inevitably it reduces long-term expectations from the current levels.


I'm not sure you could call dividends a fad because there have been dividend investors for longer than I've been buying stocks, and I bought my first stock over 30 years ago. In fact, it seems that this is a return to basics when you didn't have 24/7 information on your stock. You simply received a deposit in your account every 3 months, or received a new share or two. It's simple, and you don't even need to worry about what the price of the stock is. It's a lot like people who buy mutual funds, and then couldn't tell you how much they were worth.


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## mordko (Jan 23, 2016)

Sure, and there are growth investors now. Yet 20 years ago, while there were "dividend investors", the majority were focused on growth and nothing else. Equally, today there is a huge number of investors who ONLY care about dividends. It makes no sense to me, but hey, everyone is entitled to their opinion.


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## Market Lost (Jul 27, 2016)

I agree, I don't know why you would only focus on the dividend. These are the investors that invested in Yellow, and are probably thinking it's a good time to buy POT. Dividends are a factor, but just one, and they should be down the list.


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## gibor365 (Apr 1, 2011)

> I agree, I don't know why you would only focus on the dividend


 because retirees prefer dividend income over potential alpha


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## mordko (Jan 23, 2016)

gibor365 said:


> because retirees prefer dividend income over potential alpha


And that is irrational too. A couple of years of poor performance by these aristocrats (which happen to be very concentrated in just a few industries) and most will jump on another bandwagon. Which will exacerbate the problem for those who stick with plan A.


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## Market Lost (Jul 27, 2016)

gibor365 said:


> because retirees prefer dividend income over potential alpha


My question wasn't why you would want a good dividend, but why you would you only focus on that? I understand dividends, but I don't understand just buying a stock because it has a nice dividend. Are you confident enough in POT, D.UN, or OLY to invest in them because they have high dividends?


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## mordko (Jan 23, 2016)

I don't see why you would want a good dividend. If you are picking stocks, you really want something that is undervalued. 

Incidentally, Barkshire Hathaway does not pay dividends, but the return on your investment hasn't been all that bad.


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## Eder (Feb 16, 2011)

I invest only in companies that pay dividends and also increase them...that saves a lot of screening legwork. I leave the next biotec with a cure for cancer or gold miner with the mother lode in the Busang peninsula to others. Has worked pretty well over the years.

Some guy named after a kind of cracker taught me this.


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## james4beach (Nov 15, 2012)

I understand the idea about using dividends as a screening criteria. The theory would be that a stock that can consistently pay out dividends, and increase them, is proving that they are good at managing their cashflow and has a stability of operation that permits paying a reliable dividend. Screening for dividends is effectively like applying a cashflow stress test.

But of course the dividend itself does not intrinsically increase the stock's total return, nor does it provide any protection from declines. In fact when a company pays dividends during a sharp downturn, it is bleeding cash at a very non-optimal time ... instead of reinvesting in its operation (buying more) it is sending the cash out the door, a horrible opportunity cost. It's just as bad as selling shares at the bottom. It's mathematically equivalent.

Next time your favorite stock pays out a dividend during a stock crash, you should phone up their investor relations and ask why those idiots are sending money out the door instead of reinvesting in themselves or buying more assets at such LOW prices.

However as a test of cashflow management and stability, yes, the dividend does that.


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## mordko (Jan 23, 2016)

There are other scenarios when a long record of paying dividends does not mean a ****. 

Washington Post has done well, but I have no idea how traditional magazines and papers are planning to grow revenue in the long term. 

Utilities... Awesome when interest rates are down. Things change. 

Canadian banks... There comes a point when consumers Will run out of patience. 

Any company which has a good opportunity to make more money by investing but pays dividends instead... That's poor management.

Share buybacks through borrowing. This has been endemic as of late, grows your dividend very nicely. Does it mean you get more value? Not in any way shape or form.


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## Market Lost (Jul 27, 2016)

mordko said:


> I don't see why you would want a good dividend. If you are picking stocks, you really want something that is undervalued.
> 
> Incidentally, Barkshire Hathaway does not pay dividends, but the return on your investment hasn't been all that bad.


I used to think the same thing, but as I near retirement, and after having seen the carnage in 2008/2009, I'm looking for stocks that provide both good dividends, and those that are undervalued - which is why I really don't buy much right now.


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## Market Lost (Jul 27, 2016)

james4beach said:


> I understand the idea about using dividends as a screening criteria. The theory would be that a stock that can consistently pay out dividends, and increase them, is proving that they are good at managing their cashflow and has a stability of operation that permits paying a reliable dividend. Screening for dividends is effectively like applying a cashflow stress test.
> 
> But of course the dividend itself does not intrinsically increase the stock's total return, nor does it provide any protection from declines. In fact when a company pays dividends during a sharp downturn, it is bleeding cash at a very non-optimal time ... instead of reinvesting in its operation (buying more) it is sending the cash out the door, a horrible opportunity cost. It's just as bad as selling shares at the bottom. It's mathematically equivalent.
> 
> ...


You're making the assumption that all corporations have the same opportunities to reinvest, or have any at all. Furthermore, do you think it's better when corporations buy back their stocks? You want to talk about throwing money down the toilet, its buy backs, but I don't see too many people complaining about this. How about companies that just sit their with sitting on hordes of cash, but can't figure out what to do with it, or just waste it on useless M&A? Right now companies like IBM, and MSFT have spent billions on acquisitions that were worst than useless.

Paying out dividends, doesn't necessarily mean that there is a better alternative.


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## Market Lost (Jul 27, 2016)

mordko said:


> There are other scenarios when a long record of paying dividends does not mean a ****.
> 
> Washington Post has done well, but I have no idea how traditional magazines and papers are planning to grow revenue in the long term.
> 
> ...


The WP and other traditional print media will have difficulty surviving. However, the other stocks are fine. Consumers had their fill of banks years ago, and it still hasn't done anything to dent their profits because let's face it, there's not much choice. They also have a lot more profit centres than just their retail arms.

As for utilities, yes they are interest rate sensitive, but it's hard to argue that they've been a good investment for the past 9 years. There is plenty of opportunities to get out of them when the time comes, and I don't see that being soon.

The whole issue is that many companies don't have a better opportunity. I agree if they pay a dividend instead of reinvesting, but it's not easy for a large company, especially one in a regulated industry, to find something that is a good investment. I think there are plenty of old tech shareholders that would prefer a bigger dividend rather than another doomed purchase.


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## mordko (Jan 23, 2016)

Yeah, I lost a bit under $1000 on the Tech "investment" stupidity in late 90s. Not happy about it and I did learn my lesson but life didn't end. And while "dividend stocks" aren't exhibiting the same craziness, they have been a little too good. Oh well, we shall see.


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## mordko (Jan 23, 2016)

And it's true that it's better for a company to return the money to the shareholders than than to buy something overpriced so that the management can split the bonuses and look more important.


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## james4beach (Nov 15, 2012)

Market Lost said:


> You're making the assumption that all corporations have the same opportunities to reinvest, or have any at all.


True, it's not always possible to redeploy money effectively. Let's say for example that the company went through a great growth and earned lots of profits in the past, but can't find new opportunities to reinvest & grow. Then yes, I'd certainly want those profits paid out to me as dividends instead of sitting in stagnation.



> Furthermore, do you think it's better when corporations buy back their stocks? You want to talk about throwing money down the toilet, its buy backs


I didn't say they should buy back their stocks. Keeping earnings within the company is about much more than just buying back stocks. You can keep the money in your company to maintain existing operations, increase sales (perhaps by hiring more employees). Or pay engineers to go and investigate and build new things. There are a lot of things that retained earnings can be used for, and buying back stocks is just one of those.

Personally I think it's best when companies are able to reinvest their money to earn a return. If you read the Berkshire letters, you'll see that this is what Buffett & his management team are able to do... sometimes via securities investments, other times by acquiring companies, or deploying internal money to improve the existing companies' products & services.

Buffett points out that he believes that their management team can earn a good rate of return on generated money, and that's why it makes sense to leave money in the company instead of paying it out. He also points out that any investor is free to sell as many shares as they want to extract value, at any level of their choosing.


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## Market Lost (Jul 27, 2016)

james4beach said:


> True, it's not always possible to redeploy money effectively. Let's say for example that the company went through a great growth and earned lots of profits in the past, but can't find new opportunities to reinvest & grow. Then yes, I'd certainly want those profits paid out to me as dividends instead of sitting in stagnation.
> 
> 
> 
> ...


From what I've read, Buffett wouldn't disagree that a company should pay a dividend if there is no other good alternative. I also agree that companies shouldn't just pay a dividend for the sake of paying one, or at least increasing the dividend because that's what they're expected to do. However, I'm getting closer to retirement, and I've had enough issues in the past with non-dividend paying stocks to focus on those that are good stocks that pay dividends - note that I don't just say stocks that pay dividends. I've seen people reach for yields, and I don't think that's a wise strategy.

I also like dividend stocks because my main trading is done by writing OTM options. I've found from experience that these stocks are more predictable, and if I am in a position where a put is exercised, then I will normally accept the stock. I've built just about every position I have this way.


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## gibor365 (Apr 1, 2011)

> Are you confident enough in POT, D.UN, or OLY to invest in them because they have high dividends?


 and are you confident enough in stocks that don't pay dividends like BB or VRX?!  ... I think we were talking about dividend aristocrats ...
I just can tell that I'm more confident in JNJ, PG, PEP. MCD, FTS than in non-dividend stocks...



> I don't see why you would want a good dividend. If you are picking stocks, you really want something that is undervalued.


 Dividend stocks that has a good dividend, usually undervalued . My best performing stocks like LMT, MCD, JNJ had good dividend and were undervalued when I bought them


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## gibor365 (Apr 1, 2011)

> Incidentally, Barkshire Hathaway does not pay dividends, but the return on your investment hasn't been all that bad.


very strange comparison as practically all BRK holdings pay dividend


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## james4beach (Nov 15, 2012)

Berkshire mostly consists of fully owned subsidiary companies, and constantly reinvests its cashflow into itself. It is primarily an insurance company (80% of their revenue). Their stock portfolio is only 20% of their assets, so it's a pretty minor deal.


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## MrMatt (Dec 21, 2011)

mordko said:


> Canadian banks... There comes a point when consumers Will run out of patience.


Few points on that one.

There is nothing to complain about. No fee/low banking is widely available.
Myself I just keep my $2k minimum balance at TD, and I'm good (yes $2k at the 6.24% LOC rate is actually a cost of $12.48/yr)

Brokerages waive fees on admin plans with minimum balances.

The big banks offer low cost mutual fund products, with in person support.
For the really cheap TD eFunds are very impressive.

If people aren't happy with that, it's because they're expecting something for nothing.

Secondly, retail operations aren't where the money is anyway, they could shut down their retail operations, not deal with the headache, and still make good money.


Regarding interest rates, they can't go up too fast, if they do the foreclosures will be too politically dangerous.


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## james4beach (Nov 15, 2012)

Traditional old fashioned banking isn't what banks make money on. Looking at RBC's latest revenue (nine month period). Canadian banking, like all global banking, is nearly entirely about capital market business: trading securities, leveraged gambles, derivatives, market-making, and benefiting from central bank market stimulus and market fixing.

Traditional banking provides less than 1/3 of RBC's revenue. You think they even care about banking? Some forum members think they are holding stakes in old-fashioned banks, but really they are equity holders in giant investment dealers, brokers and hedge funds.

It's cute that Big Five banks pay such big dividends, but nobody's going to talk me into holding equity in a 30:1 leveraged hedge fund with $13 trillion in derivatives off balance sheet (and that's just RBC).

53% ... 14,491 ... capital markets operations like securities, trading, mutual funds, market speculation
28% ... 7,611 ... revenue from traditional deposits & loans
14% ... 3,719 ... insurance premiums and investment fees [*includes investments/capital markets too*]
5% ... 1,481 ... credit cards

Sums to 27,302 "Total revenue" line


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## My Own Advisor (Sep 24, 2012)

mordko said:


> Sure, and there are growth investors now. Yet 20 years ago, while there were "dividend investors", the majority were focused on growth and nothing else. Equally, today there is a huge number of investors who ONLY care about dividends. It makes no sense to me, but hey, everyone is entitled to their opinion.


I definitely care more about capital gains, I would love capital gains to go through the roof. They are just not guaranteed so I rely on a combination of dividends AND capital gains to fund my financial future.


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## My Own Advisor (Sep 24, 2012)

gibor365 said:


> and are you confident enough in stocks that don't pay dividends like BB or VRX?!  ... I think we were talking about dividend aristocrats ...
> I just can tell that I'm more confident in JNJ, PG, PEP. MCD, FTS than in non-dividend stocks...
> 
> Dividend stocks that has a good dividend, usually undervalued . My best performing stocks like LMT, MCD, JNJ had good dividend and were undervalued when I bought them


Same gibor. I have a high level of confidence that many blue-chip stocks will continue to pay dividends. Will some stop, some get cut eventually, as in decades? Maybe. But, if you own enough of them, diverse ones across various sectors, this hedges that risk and the ones that raise dividends over time will far outweigh the ones that don't.


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## mordko (Jan 23, 2016)

gibor365 said:


> very strange comparison as practically all BRK holdings pay dividend


Eh... Nope. And I am not even talking about BRK holdings. BRK itself, as a holding company, has been in a position to pay great dividends like forever. It generates a lot of cash. And yet it hasn't done so.


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## mordko (Jan 23, 2016)

MrMatt said:


> Few points on that one.
> 
> There is nothing to complain about. No fee/low banking is widely available.
> Myself I just keep my $2k minimum balance at TD, and I'm good (yes $2k at the 6.24% LOC rate is actually a cost of $12.48/yr)
> ...


- most Canadian mutual funds have extremely high fees. The average is more than double of those in the UK or US. If you go to a bank like RBC they will offer you a fund with 2.15% MER. They will also tell you that it's below Canadian average.

- what Canadian big banks charge for the privilGe of giving them your money, and for a host of other services is much, much higher than elsewhere. 

- they pay an effective zero on so called HISA accounts, and have been doing so even at higher BOC interest rates. No idea who uses such accounts. 

- the products they offer, such as mortgages, are a lot worse and less diverse than in the UK

- big banks don't compete with each other, they simply mirror what the others are doing

While there are a couple of cheap internet alternatives out there, Canadians, for the most part, have stuck with big 5. I have trouble believing it will stay like this. And even if retail is only a third of their profits, that's a hell of a lot to lose.


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## Eclectic12 (Oct 20, 2010)

mordko said:


> Sure, and there are growth investors now. Yet 20 years ago, while there were "dividend investors", the majority were focused on growth and nothing else ...


Do you have some sources for this? 
Or was this another country?

Twenty to thirty years ago I can recall a lot of articles in the G&M profiling dividend paying stock, with commentary that the institutional investors were snapping up dividend paying stocks.

If the majority was focused on growth only then I wonder why such a large market demand didn't change things like the Royal bank that has paid dividends since 1870.

I'll have to check but it wouldn't surprise me if twenty, thirty and forty years ago, the bulk of the index stocks paid dividends.


Cheers


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## Eclectic12 (Oct 20, 2010)

mordko said:


> I don't see why you would want a good dividend. If you are picking stocks, you really want something that is undervalued.
> Incidentally, Barkshire Hathaway does not pay dividends, but the return on your investment hasn't been all that bad.


Paying or not paying dividends doesn't change whether one is buying undervalued or overvalued stocks.
Where one is looking for undervalued ... paying or not paying dividends should make no difference.

Most of the stocks I owned that have go bankrupt didn't pay dividends. Should I extrapolate that I should stick to dividend paying stocks only? :biggrin:


Cheers


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## Eclectic12 (Oct 20, 2010)

Market Lost said:


> ... As for utilities, yes they are interest rate sensitive, but it's hard to argue that they've been a good investment for the past 9 years. There is plenty of opportunities to get out of them when the time comes, and I don't see that being soon.


Or you can buy more when they are low than trim when they are high.

A key point for the utilities is that while one can choose to skip the new car or switch from Coke to a no-name cola - most people will choose to make sure the lights stay on and the furnace keep running.




Market Lost said:


> ... The whole issue is that many companies don't have a better opportunity ...


There's also what other market players are doing. Where one would prefer to skip the dividend paying stock, which Canadian bank does one buy? It looks more like one would have to skip the entire segment. Similar for utilities.




mordko said:


> ... And while "dividend stocks" aren't exhibiting the same craziness, they have been a little too good ...


You do realise that most of the Canadian and S&P500 pay dividends, right?
The last numbers I saw posted here was something like 80% of the S&P500 pays dividends. I'll have to check the S&P TSX 60 but I believe it was higher.

But where one is buying undervalued ... why would one care?

Where one is worried about dividend or growth, it sounds like one has messed up on the "undervalued" analysis. :biggrin:


Cheers


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> ... It's cute that Big Five banks pay such big dividends, but nobody's going to talk me into holding equity in a 30:1 leveraged hedge fund with $13 trillion in derivatives off balance sheet (and that's just RBC) ...


Good points ... but I believe you've said you hold the index. This means that while it is diluted - you are holding pretty much all of them ... or rather the ETF company is.


Cheers


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## AltaRed (Jun 8, 2009)

My Own Advisor said:


> I definitely care more about capital gains, I would love capital gains to go through the roof. They are just not guaranteed so I rely on a combination of dividends AND capital gains to fund my financial future.


Indeed. 

Sometimes I denigrate the discussion around dividend stocks but that is mostly to put overall investing criteria into perspective and cause discussion. Investment choices should be on Total Return performance and metrics such as ROE, etc. to see 'true growth'. And if the best performing stocks also pay dividends, and better yet, have a track record of dividend growth, so much the better. The problem with dividend stocks today is most are fully valued, or overvalued, due to investors fleeing from pathetic fixed income returns. It is not healthy because that causes companies to raise their dividends to attract even more investors to drive up stock price even more. A key metric investors should use is to look at dividend payout as a percentage of free cash flow to see if management is behaving badly in returning too much cash to shareholders at the risk of insufficient re-investment of capital, or horror, incurring more cheap (for now) debt to fund dividends.


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## Eclectic12 (Oct 20, 2010)

^^^^

I can see a bit of pressure but are companies who have paid dividends (most of the TSX) really changing their policies based on some extra cash flowing into the market?

They didn't seem to do so when they were taking a beating during the high flying tech companies run up. I would have thought the explosive growth plus complaints would have been far more pressure to change than now.


The other question is how much money is flowing in. I know far more who don't bother investing at all versus those who are shifting money from fixed income assets to equity assets or who are choosing equity with a payment versus equity without.


Cheers


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## humble_pie (Jun 7, 2009)

james4beach said:


> Traditional banking provides less than 1/3 of RBC's revenue. You think they even care about banking? Some forum members think they are holding stakes in old-fashioned banks, but really they are equity holders in giant investment dealers, brokers and hedge funds.
> 
> It's cute that Big Five banks pay such big dividends, but nobody's going to talk me into holding equity in a 30:1 leveraged hedge fund with $13 trillion in derivatives off balance sheet (and that's just RBC)




james4 isn't it time to settle down & stick to the investment knitting.

here you say nobody's going to talk you into holding equity in a glorified hedge fund like roybank; but you've also said many times that you're crazy about XIU, the TSX top-60 ETF that's so heavy in canadian banks & financials.

other times you say you heartily recommend XIU, XIC, various core BMO & vanguard ETFs but then you agree these can be frankenfunds with some alleged securities held via representational sampling, index proxies, futures & options contracts. Or else their securities are out on loan. Or else both.

knitting doesn't proceed in all directions at once though. Knit one, purl one, wool over.

.


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## Nelley (Aug 14, 2016)

It is not just a 30-1 levered hedge fund-it is a hedge fund with more political power in this country than just about anyone other than the other huge banks-they are almost actually part of the federal government.


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## Pluto (Sep 12, 2013)

james4beach said:


> I understand the idea about using dividends as a screening criteria. The theory would be that a stock that can consistently pay out dividends, and increase them, is proving that they are good at managing their cashflow and has a stability of operation that permits paying a reliable dividend. Screening for dividends is effectively like applying a cashflow stress test.
> 
> But of course the dividend itself does not intrinsically increase the stock's total return, nor does it provide any protection from declines. In fact when a company pays dividends during a sharp downturn, it is bleeding cash at a very non-optimal time ... instead of reinvesting in its operation (buying more) it is sending the cash out the door, a horrible opportunity cost. It's just as bad as selling shares at the bottom. It's mathematically equivalent.
> 
> ...


When you get older and you need income to pay your personal bills you might think differently. 
During a sharp downturn dividends means you get cash for personal expenses without having to sell stock at a very bad time. this relates to your strategy of accumulating non-dividend paying stock and selling it off in bits and pieces during retirement - it doesn't work well during sharp downturns. I would phone investor relations and say thank god you have paid the dividend because now I don't have to sell any stock at rock bottom prices. 

It is understandable that younger people want growth/capital gains. Makes sense. But when one is older, ones focus changes. 

Sometimes I think you are overly influenced by perennial doomsters, like maybe Peter Schiff.


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## AltaRed (Jun 8, 2009)

Eclectic12 said:


> ^^^^
> 
> I can see a bit of pressure but are companies who have paid dividends (most of the TSX) really changing their policies based on some extra cash flowing into the market?
> 
> ...


It is only worth upping one's dividend IF it is going to attract investors sufficiently enough that it results in share price appreciation, i.e. prices are bid up. It would have made little to no difference in the tech bubble whether a company boosted its dividend by X. Everyone was chasing tech momentum stocks and not paying much attention to staid old dividend stocks. But spin forward to post 2008 and a dividend boost of the same X is more than enough to attract more investor interest and relatively higher share price appreciation. The game is played because a certain blue chip company I know well thought the same way. It didn't much care about boosting its dividend 15 years ago because the 'reward ratio' wasn't high enough. But that same company has made a lot more 'noise' boosting its dividend in recent years because the 'reward ratio' is much better (while enterprise growth has actually decreased).


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## gibor365 (Apr 1, 2011)

> There is nothing to complain about.


 I agree! We don't pay any fees on checking/saving accounts at all, free transfers to online banks (hunting for higher rates), trading fees $6.95 with occasional free ETF trading, credit cards that give 4% on gas, groceries, easy get LoC etc...
Canadians just used to it  , comparing to Israeli banks , Canadian banks are awesome


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## gibor365 (Apr 1, 2011)

> When you get older and you need income to pay your personal bills you might think differently.
> During a sharp downturn dividends means you get cash for personal expenses without having to sell stock at a very bad time. this relates to your strategy of accumulating non-dividend paying stock and selling it off in bits and pieces during retirement - it doesn't work well during sharp downturns. I would phone investor relations and say thank god you have paid the dividend because now I don't have to sell any stock at rock bottom prices.


According to David Fish's Dividend CCC list, from 41 companies that increased dividends every year for 45 years, only 1 company (MAS) cut dividends.

AFAIR, Dogs of Dow, mini-dogs of Dow, dogs of TSX60 also were mostly outperforming indexes


> you've also said many times that you're crazy about XIU, the TSX top-60 ETF that's so heavy in canadian banks & financials


 I created paper portfolio with 20 stocks from TSX60 , this portfolio was based on 3 criteria, high yield, low payout and low P/E... and this portfolio was significantly outperforming XIU.
Similar criteria portfolio I created from XDV extract that also outperformed index


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## james4beach (Nov 15, 2012)

Yes I realize I am saying contradictory things... on one hand, I think bank equities are not great investments, on the other hand I do like XIU, XIC, ZCN and keep recommending them.

In my defense, I've tried pretty hard to minimize my exposure to bank stocks over the years.


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## agent99 (Sep 11, 2013)

james4beach said:


> In my defense, I've tried pretty hard to minimize my exposure to bank stocks over the years.


They have been among the very best performing stocks, so please accept my condolences


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## james4beach (Nov 15, 2012)

It's very lucky for shareholders that the banks did not disclose their true financial situation in 2008, and very lucky that both US and Canadian central banks give limitless credit to the Canadian banks. But you must realize that if the central banks, CMHC, and CPP did not provide this stimulus, bank shares could have been wiped out.

Big Five shares are beneficiaries of special government intervention from two governments. They have not intrinsically been good investments. Will you get as lucky during the next credit contraction?


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## gibor365 (Apr 1, 2011)

james4beach said:


> It's very lucky for shareholders that the banks did not disclose their true financial situation in 2008, and very lucky that both US and Canadian central banks give limitless credit to the Canadian banks. But you must realize that if the central banks, CMHC, and CPP did not provide this stimulus, bank shares could have been wiped out.
> 
> Big Five shares are beneficiaries of special government intervention from two governments. They have not intrinsically been good investments. Will you get as lucky during the next credit contraction?


If Canadian 5 big banks are wiped out, Canada as a country gonna be wiped out too 

then you won't need money, but guns to protect vegetables and animals on your backyard :biggrin:


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## financialuproar (Jan 26, 2010)

One reason why dividend stocks have done so well in the last 1/5/10/20 years is because of interest rates. As rates moved down, more and more people went into stocks to get yield. When the trend reverses, I can envision a decade of sub par returns as valuations return to more normal levels. 

Of course, it's easy to say the same thing about all stocks. That's why I'm aggressively paying down my mortgage instead of investing.


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## Nelley (Aug 14, 2016)

financialuproar said:


> One reason why dividend stocks have done so well in the last 1/5/10/20 years is because of interest rates. As rates moved down, more and more people went into stocks to get yield. When the trend reverses, I can envision a decade of sub par returns as valuations return to more normal levels.
> 
> Of course, it's easy to say the same thing about all stocks. That's why I'm aggressively paying down my mortgage instead of investing.


When the trend reverses, bankruptcies at all levels of government are inevitable-so I don't know how this plays out.


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## canew90 (Jul 13, 2016)

Many discussion about dividends or choosing dividend stocks try to compare, or assume that ones objective is total return. It also assumes that one is picking and trading stocks to obtain the greatest return or match market returns.

I was not a good trader, stock picker, market timer or able to determine market trends. It was only when I found the Connolly Report and read about his strategy that I felt there was a better way to invest. The key difference for me, was that the objective was to invest for future income and income growth, rather than market or even total return. By concentrating on the income and growth of income ones portfolio generates, made my selections easier and I no longer looked to Take Profits or worry about stocks other than those I had chosen to monitor and buy. Selling was not considered except in rare cases.

Now that I've been retired for 10 years, our income more than exceeds our expenses, we reinvest 60% of our dividends and finally our total return has exceeded expectations (though this was not a concern during the accumulation phase). So for us dividend investing worked, was the easiest method of investing and the most rewarding.


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## Nelley (Aug 14, 2016)

canew90 said:


> Many discussion about dividends or choosing dividend stocks try to compare, or assume that ones objective is total return. It also assumes that one is picking and trading stocks to obtain the greatest return or match market returns.
> 
> I was not a good trader, stock picker, market timer or able to determine market trends. It was only when I found the Connolly Report and read about his strategy that I felt there was a better way to invest. The key difference for me, was that the objective was to invest for future income and income growth, rather than market or even total return. By concentrating on the income and growth of income ones portfolio generates, made my selections easier and I no longer looked to Take Profits or worry about stocks other than those I had chosen to monitor and buy. Selling was not considered except in rare cases.
> 
> Now that I've been retired for 10 years, our income more than exceeds our expenses, we reinvest 60% of our dividends and finally our total return has exceeded expectations (though this was not a concern during the accumulation phase). So for us dividend investing worked, was the easiest method of investing and the most rewarding.


Yes, because total return is a bit misleading-a return in the form of a cash dividend is a higher quality/more sustainable return than simply a price rise of an equity.


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## james4beach (Nov 15, 2012)

gibor365 said:


> If Canadian 5 big banks are wiped out, Canada as a country gonna be wiped out too


I mean that the equity can get wiped out. There's a big difference between the equity getting wiped out and the bank itself getting wiped out. The big banks will survive and will always be supported by government. The banks will keep operating, and the deposits will be safe. The equity, however, will not be. There is no guarantee about the equity ... common equity is the core of bank capitalization. When banks need more capital (e.g. Deutsche Bank), it destroys equity holders.

See Citigroup as a great example. Bank survived, equity wiped out. You're going to see the same thing now with Deutsche Bank, Barclays, and Credit Suisse.


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## doctrine (Sep 30, 2011)

financialuproar said:


> One reason why dividend stocks have done so well in the last 1/5/10/20 years is because of interest rates. As rates moved down, more and more people went into stocks to get yield. When the trend reverses, I can envision a decade of sub par returns as valuations return to more normal levels.
> 
> Of course, it's easy to say the same thing about all stocks. That's why I'm aggressively paying down my mortgage instead of investing.


So it had nothing to do with the high quality businesses that produced the dividends and has just been a 20 year exercise in passing on interest savings? This is possibly the biggest oversimplification of corporate finance I've ever seen. Stocks equally outperformed all other asset classes during long stretches of insanely high interest rates where they were borrowing money at multiple times the interest rates of today. 

Large, publicly traded companies can only get by without returning capital if they are successfully reinvesting and growing their business. The trend of technology companies, now mature and dominating their market, beginning to return that capital to investors is a sign of the times. Microsoft, Apple, Cisco, Intel, etc would have given the same spiel ten years ago about not paying dividends, as they were still able to generate an excess return on capital. I guarantee you that Amazon, Facebook and Google will all be paying dividends eventually, as a $500B company can only grow at 20% CAGR for so long. 

Saying that a company should retain all profits is only true in a limited number of circumstances, especially for large companies, and doing so often gives management the tools to "invest" in their business without ensuring a disciplined return on capital. If you never get any money back from your investment, why are you investing again? You can't grow forever, and declining returns on invested capital is a fact of life. Apple has little to gain by dumping $100B into developing a dozen new iPhones and would likely be dumping capital down the toilet, and thus is better served returning a portion while focusing on steady improvement (with less/more efficient use of capital).


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## agent99 (Sep 11, 2013)

james4beach said:


> But you must realize that if the central banks, CMHC, and CPP did not provide this stimulus, bank shares could have been wiped out.


Why MUST I realize that? The Canadian government made some good moves that helped the banks and the economy in general. That was their responsibility. They also helped bail out the auto makers. Hopefully you also avoided them!

G&M did an extensive report on the financial crisis. It makes interesting reading:

http://www.theglobeandmail.com/report-on-business/the-financial-crash/article14257785/

By the way, I have owned all the big banks for a long time and have no intention of selling those stocks. They have consistently beaten the TSX by a large margin. Buy those TSX etfs and you get the banks anyway, but not the performance.

For example, Royal Bank:
https://dl.dropboxusercontent.com/u/54783344/ry performance.JPG


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## james4beach (Nov 15, 2012)

agent99, their historical performance is not in question. And yes, the shares survived and thrived after the support. But this last round of government support was done in away _that did not destroy the banks' equity._

That was very lucky and very generous, but I'm saying it won't always happen. The next time government support is needed, the banks may be forced to recapitalize very heavily, wiping out shareholder equity in the process. In fact the Canadian government is already telling you to get ready for this: there have been may statements about bail-ins, warning you about the difference between supporting insured deposits, vs everything else.

The government is telling you that you should be prepared to accept losses, if you are an unsecured creditor, or if you are an equity holder in a bank that is getting recapitalized. That's what they're telling you; are you listening?

IMO the government is being vocal about this because they can't afford the kind of support they did the last time around. They are trying to gently prepare the marketplace for the reality of what the next round of government support for banks will look like. And IMO _it's going to be very rough on your shares._


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## agent99 (Sep 11, 2013)

James, bailing out the banks, also pumped money into the economy. If that had not been done, the whole economy would have failed. Successful banks are an integral part of our economy. I can see avoiding certain other sectors, but not the banks. You have missed out on a lot by buying those etfs with miniscule returns.


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## Market Lost (Jul 27, 2016)

gibor365 said:


> and are you confident enough in stocks that don't pay dividends like BB or VRX?!  ... I think we were talking about dividend aristocrats ...
> I just can tell that I'm more confident in JNJ, PG, PEP. MCD, FTS than in non-dividend stocks...
> 
> Dividend stocks that has a good dividend, usually undervalued . My best performing stocks like LMT, MCD, JNJ had good dividend and were undervalued when I bought them


I don't invest in companies without dividends, so I really wouldn't know.

My point was that some people only invest in because there is a large dividend, that's not good investing, IMO. Furthermore, although, I do like most of your picks, I'm not as confident in PG, or PEP, as you may be. P&G seems to be struggling with the price point of its products, and Gillette is having a lot of issues with competition, especially from Dollar Shave, and traditional wet shaving. Right now PG&'s revenues are in a bad downward trend, and it's rather scary. Pepsi is rather flat, and with current health trends, it will have to do something to adapt.


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## james4beach (Nov 15, 2012)

I'm hammering on this because I feel a duty to warn others about the risk of their bank investment. Many retirees own lots of bank shares and I don't want to see you guys ruined.

Remember, the Canadian government has been vocal that next time banks need support, there will be bail-ins. They don't want to cause alarm so they are not spelling out the fact that this will destroy shareholder equity (i.e. your shares). The government is saying, very clearly, that the next round of government support (as Canada did in 2007-2008) will look very different. There will be bail-ins.

What do bail-ins mean for shareholder equity? Here's a good article on it.

The law firm writes that in method A of bail-ins: "authorities seek to recapitalize a failing bank through the write-down of liabilities and/or converting liabilities to equity ... In the process, *shareholders would be severely diluted or wiped out*"

And method B of bail-ins: "the bank is split in two, a good bank (or bridge bank) and a bad bank ... *Shareholders and holders of other instruments of ownership may have their shares canceled, transferred, diluted* or partially canceled/transferred"


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## james4beach (Nov 15, 2012)

agent99 said:


> James, bailing out the banks, also pumped money into the economy. If that had not been done, the whole economy would have failed. Successful banks are an integral part of our economy. I can see avoiding certain other sectors, but not the banks. You have missed out on a lot by buying those etfs with miniscule returns.


You're still not getting it. I'm saying that the next time they support the banks, it's very possible your shares will get wiped out in the process.


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## Market Lost (Jul 27, 2016)

Eclectic12 said:


> Do you have some sources for this?
> Or was this another country?
> 
> Twenty to thirty years ago I can recall a lot of articles in the G&M profiling dividend paying stock, with commentary that the institutional investors were snapping up dividend paying stocks.
> ...


I can tell you that you are correct. I had an investing book from about 40 years ago that talked about selling stocks short, and it mentioned that you didn't have to worry about paying dividends if you held short for an extended period as most stocks didn't pay one.


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## My Own Advisor (Sep 24, 2012)

If banks fail, it's not just bank shareholders that will suffer.

Most pension plans, ETFs and funds are full of bank shares.


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## Market Lost (Jul 27, 2016)

agent99 said:


> They have been among the very best performing stocks, so please accept my condolences


Absolutely. Avoiding Canadian banks is rather strange in my mind seeing as how they are such heavy lifters in the TSX.


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## Market Lost (Jul 27, 2016)

james4beach said:


> It's very lucky for shareholders that the banks did not disclose their true financial situation in 2008, and very lucky that both US and Canadian central banks give limitless credit to the Canadian banks. But you must realize that if the central banks, CMHC, and CPP did not provide this stimulus, bank shares could have been wiped out.
> 
> Big Five shares are beneficiaries of special government intervention from two governments. They have not intrinsically been good investments. Will you get as lucky during the next credit contraction?


You say this as if it's a bad thing. 

The last credit contraction was the worst since the Great Depression, so I'm not sure how the next is suppose to be worse, or even when it will come - although it's not likely in our lifetime.


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## Eder (Feb 16, 2011)

Why not mention there never was a bailout of Canadian banks but they did receive over 100 billion of loans to ensure plenty of liquidity to help business survive after the incredible stupidity of American banking industry. Also that every nickel of loans was promptly paid back. Or that not any of the Canadian banks was ever in danger of failure had they not received liquidity loans.

I guess it wouldn't be alarmist enough for a good story in that case... better to keep a grassy knoll in the equation and all.


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## mordko (Jan 23, 2016)

Eclectic12 said:


> Do you have some sources for this?
> Or was this another country?
> 
> Twenty to thirty years ago I can recall a lot of articles in the G&M profiling dividend paying stock, with commentary that the institutional investors were snapping up dividend paying stocks.
> ...


I was talking about the dot com bubble. Those were the days for growth stocks, very few cared about dividends when you could double your capital in a month. 

If you need a source, the Intelligent Investor has a whole chapter on how investors go through cycles of ignoring dividends altogether and then paying excessive attention.


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## mordko (Jan 23, 2016)

Eder said:


> Why not mention there never was a bailout of Canadian banks but they did receive over 100 billion of loans to ensure plenty of liquidity to help business survive after the incredible stupidity of American banking industry. Also that every nickel of loans was promptly paid back. Or that not any of the Canadian banks was ever in danger of failure had they not received liquidity loans.
> 
> I guess it wouldn't be alarmist enough for a good story in that case... better to keep a grassy knoll in the equation and all.


Actually at least one of the big five would have gone bankrupt had they used American requirements for solvency. And it's true that Canadian banks took fewer risks, but that's because they didn't need to. There is little genuine competition and they can mil clients without taking risks.


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## Market Lost (Jul 27, 2016)

james4beach said:


> You're still not getting it. I'm saying that the next time they support the banks, it's very possible your shares will get wiped out in the process.


James, I think the issue is that you're beating the doomsday drum, and let's face it, if the banks are in trouble then all bets are off on stocks in any event. Do you think non-dividend stocks are going to fare any better? No, they'll fare worse, just as they did last melt-down.


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## Nelley (Aug 14, 2016)

james4beach said:


> You're still not getting it. I'm saying that the next time they support the banks, it's very possible your shares will get wiped out in the process.


You are assuming that people just ride the bank shares right down the tubes-being a dividend investor doesn't mean you should ignore everything else (including price action).


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## mordko (Jan 23, 2016)

Big five won't necessarily fail,the probability of that is low. They will underperform over the long term, along with other fully priced or overpriced stocks. There is simply no room for increasing profits in Canada, everybody has already borrowed to the limit. So, it pushes the big 5 into US, where competition is more intense and the margins are smaller. At the same time they are starting to get competition on home soil. Home prices fall = major squeeze.


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## new dog (Jun 21, 2016)

We haven't seen an inverse yield curve yet so odds are still in favour of the banks at this time. Of course manipulation of everything is here today so we may not get the inverse curve before the fall.


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## Eclectic12 (Oct 20, 2010)

My Own Advisor said:


> If banks fail, it's not just bank shareholders that will suffer.
> 
> Most pension plans, ETFs and funds are full of bank shares.


I'm not sure why you are stopping there ... unless it's a focused MF such as mining, there's probably bank shares in it. Several split share companies have a high percentage of bank shares, ignoring the split share companies that are simply banks (ex. BNS split is BNS, allBanc split, DFN etc.). I would be surprised if CPP doesn't own any banks.


Cheers


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## Eclectic12 (Oct 20, 2010)

mordko said:


> Actually at least one of the big five would have gone bankrupt had they used American requirements for solvency. And it's true that Canadian banks took fewer risks, but that's because they didn't need to ...


I'm not so sure it is as simple as this makes it out to be. The bank CEOs had loudly argued that if they weren't allowed to merge to gain economies of scale as well as have the rules more aligned with the US rules - the US big banks would wipe them out. The Canadian gov't disagreed.


Cheers


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## canew90 (Jul 13, 2016)

I don't know when or if there will be another crash or what will cause it, but is it likely to be as severe as the 1929-1933 crash? Most of the big companies survived that one and many did quite well. There were lots of cuts, but many continued paying dividends even if not increasing them.

I'd be more concerned if suddenly there was a big jump in inflation, similar to the 1970's where interest rates jumped to double digit. Regardless, I'll take my chances with the large, financially sound and those who have been around the bend and continue to pay me my dividends.


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## agent99 (Sep 11, 2013)

Using RY as an example over the period covered in this link:
https://dl.dropboxusercontent.com/u/54783344/ry performance.JPG

$10k invested in 1995 would now be worth $232k if invested in RY and just $32k if invested in TSX, So, how much would RY have to drop before it's performance matched say XIU (that also includes the banks and many companies that are heavily reliant on the banks)?

James, I am too old to do the math. Maybe you could help out


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## humble_pie (Jun 7, 2009)

james4beach said:


> Yes I realize I am saying contradictory things... on one hand, I think bank equities are not great investments, on the other hand I do like XIU, XIC, ZCN and keep recommending them.
> 
> In my defense, I've tried pretty hard to minimize my exposure to bank stocks over the years.


but how long can one sit on both sides of the fence & maintain such bipolar views, while trying to keep a straight face. Or are all the contradictions supposed to be some kind of running joke.





james4beach said:


> ... The next time government support is needed, the banks may be forced to recapitalize very heavily, wiping out shareholder equity in the process. In fact the Canadian government is already telling you to get ready for this: there have been may statements about bail-ins, warning you about the difference between supporting insured deposits, vs everything else.
> 
> The government is telling you that you should be prepared to accept losses, if you are an unsecured creditor, or if you are an equity holder in a bank that is getting recapitalized. That's what they're telling you; are you listening?
> 
> IMO the government is being vocal about this because they can't afford the kind of support they did the last time around. They are trying to gently prepare the marketplace for the reality of what the next round of government support for banks will look like. And IMO _it's going to be very rough on your shares._


jas4, above you are pointing out how an accident could easily wipe out canadian bank equities via bail-ins & this will pulverize shareholder value, destroying many ETFs & mutual funds & likely crippling the canada pension plan itself.


but in a nearby thread (below) you are also saying that bank-heavy ETFs like XIU are great, beautiful, amazing, real winners, rock-bottom MERs, pretty great.

which story is the one that you actually do truly believe? surely it's time to come clean & get down off the fence.





james4beach said:


> There are still some great ones [ETFs]. XIU has been around since 1999, trades tens of millions of shares daily (extremely liquid) and has 6.9% annual return since inception. And while paying out nearly 3% dividends, all eligible dividends. That's nothing to sneeze at! This has been a great ETF and continues to be.
> 
> XIC and ZCN have taken that management fee even lower, at rock-bottom 0.06% for TSX Composite exposure. Beautiful!
> 
> ...



some bond ETFs are "pretty amazing?" then why are you saying in another thread that you refuse to hold a single bond ETF because of their risks, but instead you choose to hold individual bonds ... each:


.


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## gibor365 (Apr 1, 2011)

> Yes I realize I am saying contradictory things... on one hand, I think bank equities are not great investments, on the other hand I do like XIU, XIC, ZCN and keep recommending them.
> 
> In my defense, I've tried pretty hard to minimize my exposure to bank stocks over the years.


It's really funny  , So, my understanding you want to buy (great ETF) XIU and short financials (XFN)?!

XIU allocation
Financial 39%
Energy	21%
Basic Mat.	12%
Industrials	7.5% etc

So, you will be shorting 39% of ETF! and without Financials, XIU allocation would be 34% Energy (I think you also wanted to short energy ) and 20% Materials! Great stuff james


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## james4beach (Nov 15, 2012)

humble_pie said:


> jas4, above you are pointing out how an accident could easily wipe out canadian bank equities via bail-ins & this will pulverize shareholder value, destroying many ETFs & mutual funds & likely crippling the canada pension plan itself. ... but in a nearby thread (below) you are also saying that bank-heavy ETFs like XIU are great, beautiful, amazing, real winners, rock-bottom MERs, pretty great.
> 
> which story is the one that you actually do truly believe?


I'll stick to the story that ETFs like XIU and XIC are some of the best Canadian investments around and I continue to recommend them. I think that I can like XIU as a vehicle while at the same time voicing risks about Canadian bank stocks.

There's nothing wrong with holding investments and being aware of the risks involved with them. Everyone should familiarize themselves with the risks of what they invest in.

It's a risk; it's not a certainty such a catastrophe will happen. And even if it does happen, XIU will (as indices do) adapt over time and in fact pick up new-and-upcoming stocks that may rise to dominate the market caps. That's a great thing about indexing. Look at Nortel for example; it was once a huge part of the Canadian index, and then got wiped out. XIU held plenty of it and still, through all that, has shown great returns. I think that's a nice illustration of why indices are attractive ... they drop losers and pick up new winners over the long period. Even if bank stocks turn sour going forward, indexes will adapt and still offer good returns.


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## james4beach (Nov 15, 2012)

To put it another way, even if Big Five banks have their equity wiped out (which is just a risk, not a certainty) ... *even if that happens!* ... I still trust XIU's ability to trade through that situation more than my own ability to (a) adjust my sector weights just right (b) avoid the exposure for the right period (c) start buying financials again at the bottom (d) stick with this plan over the 10+ years it may take to play out.


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## Market Lost (Jul 27, 2016)

james4beach said:


> To put it another way, even if Big Five banks have their equity wiped out (which is just a risk, not a certainty) ... *even if that happens!* ... I still trust XIU's ability to trade through that situation more than my own ability to (a) adjust my sector weights just right (b) avoid the exposure for the right period (c) start buying financials again at the bottom (d) stick with this plan over the 10+ years it may take to play out.


The risk is if the Canadian, and likely world economy, collapses into a smoldering heap. Otherwise, the chance of any of the big banks having an issue is remote. The only very low risk is the LIBOR lawsuit that involves RY. But that's been thrown out once, and it will be thrown out again from what I can see.


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## Oldroe (Sep 18, 2009)

I don't need to look at what's held in XIU if the 5 banks go to zero 2/3 of XIU is zero.

So you really know nothing about risk little about Canadian banks and less about economics .


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## mordko (Jan 23, 2016)

None of the banks is going to zero, at least not quickly. The government would be forced to step in if any of the banks screw up. 

Long term underperformance, on the other hand, is a distinct possibility.


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## Nelley (Aug 14, 2016)

mordko said:


> None of the banks is going to zero, at least not quickly. The government would be forced to step in if any of the banks screw up.
> 
> Long term underperformance, on the other hand, is a distinct possibility.


"None of the banks is going to zero, at least not quickly"-not the boldest prediction I've ever heard.


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## CPA Candidate (Dec 15, 2013)

Dividend investing needs no defense, it works. Canada's high dividend index (XEI) has outperformed the TSX (XIC) over 5 years (YTD August 31).

A growing dividend over time is a hallmark of maturity, stability and predictability. It is also a sign of long term growth, as dividends cannot increase forever without earnings/cashflow growing as well.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> I'll stick to the story that ETFs like XIU and XIC are some of the best Canadian investments around and I continue to recommend them. I think that I can like XIU as a vehicle while at the same time voicing risks about Canadian bank stocks.
> 
> There's nothing wrong with holding investments and being aware of the risks involved with them. Everyone should familiarize themselves with the risks of what they invest in.


True ... though being aware of the risks then choosing to hold them is different IMO from recommending others avoid them, talking about supposedly working hard to minimise one's exposure while apparently being happy to buy XIU.

Isn't this along the lines of "do as I say, not as I do"?

Note that I am not trying to attack you but understand why the emphasis on skipping what you hold.




james4beach said:


> ... XIU will (as indices do) adapt over time and in fact pick up new-and-upcoming stocks that may rise to dominate the market caps. That's a great thing about indexing. Look at Nortel for example; it was once a huge part of the Canadian index, and then got wiped out.


 ... I much preferred to have a tiny bit in XIC and the bulk bought at $3 then sold between $11 and $8. I suppose I should count the three shares BCE spun my way but they were small potatoes. I didn't bother worrying about what the pension and MFs held for similar reasons to the "drop and grab new" methods that are being referred to.


Cheers


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## humble_pie (Jun 7, 2009)

james4beach said:


> To put it another way, even if Big Five banks have their equity wiped out (which is just a risk, not a certainty) ... *even if that happens!* ... I still trust XIU's ability to trade through that situation more than my own ability to (a) adjust my sector weights just right (b) avoid the exposure for the right period (c) start buying financials again at the bottom (d) stick with this plan over the 10+ years it may take to play out.



oh dear. Jas4 u are too smart not to understand this. In the remotest chance that canada's big 5 chartered banks would be wiped out in a global financial armageddon, there will be no XIU! there will be no functioning TSX! there will be no mainframes capable of running the S&P indexes!

there will be no food left in grocery stores! hydro itself might even be cut! traffic gridlock! abandoned cars! no public transport! there will be riots in the streets!

the story gets worse, but - so sorry, i'm truly not intending any disrespect here - the picture of yourself sitting in the midst of all this chaos & fretting over whether you can go on loving XIU or whether you could manipulate your portfolio into (a), (b), (c) or (d) is, ah, _delicious_.

.


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## james4beach (Nov 15, 2012)

humble_pie isn't that a bit overly dramatic? If the banks under-perform going forward (perhaps due to equity dilution resulting from raising new capital, or persistent loan losses)... the performance might be poor, but there will still be bank stocks. I think this is the most likely scenario: not wiped out, just under-perform.

And XIU or XIC would do just fine in such a scenario. One sector under-performs, another out-performs.


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## Oldroe (Sep 18, 2009)

I think your understanding of risk could be wrote on the pointy end of a pin.


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## humble_pie (Jun 7, 2009)

^^

alas u just said if the big 5 banks *have their equity wiped out* ... now you're saying that the global banking network could collapse (we came within a centimetre in 2008/09) but canadian banks will nevertheless be able to motor peacefully on with nothing worse than minor under-performance?

i don't understand, could you explain what you mean with the statement that *XIU or XIC would do just fine in such a scenario?* 

XIU is mostly banks plus energy. It would collapse. XIC doesn't appear to hold the 253 stocks it claims it holds, the costs of holding & re-balancing (XIC is supposed to be a weighted index) all those stocks in professional custody could easily approach 1% or more. Keep in mind that the canadian market for the entire latter half of XIC is thin & illiquid, with huge spreads between bids & asks. The costs of re-balancing alone would be crippling, if a fund were to hold those stocks in outright ownership.

in addition, global financial collapse would destroy the tail half or possibly the tail two-thirds of the companies in XIC. 

lastlly i'm mystified by this *one sector under-performs, another out-performs* as a theme that could be counted upon to save these 2 core canadian ETFs while the rest of the world burns down.

are you saying that this philosophy will keep XIU & XIC buoyant & happy no matter what happens in global finance?
did this lighter-than-air-sweeter-than-honey philosophy prop up XIU & XIC during the 2008/09 crash?

oops somehow i missed dat .each:


.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> humble_pie isn't that a bit overly dramatic?
> 
> If the banks under-perform going forward (perhaps due to equity dilution resulting from raising new capital, or persistent loan losses)... the performance might be poor, but there will still be bank stocks. I think this is the most likely scenario: not wiped out, just under-perform.


If it really is under performance - then aren't you doing the same by writing:



> I'm hammering on this because I feel a duty to warn others about the risk of their bank investment. Many retirees own lots of bank shares and I don't want to see you guys ruined.
> 
> Remember, the Canadian government has been vocal that next time banks need support, there will be bail-ins. They don't want to cause alarm so they are not spelling out the fact that this will destroy shareholder equity (i.e. your shares). The government is saying, very clearly, that the next round of government support (as Canada did in 2007-2008) will look very different. There will be bail-ins.
> 
> ...


Either there's two different scenarios being talked about here IMO ... or the broader impacts are being ignored.




james4beach said:


> ... And XIU or XIC would do just fine in such a scenario. One sector under-performs, another out-performs.


In what scenario is the bank equity wiped out where XIU and XIC chug merrily along?

Is it really reasonable to have the index, company pensions, CPP etc., losing massive amounts of equity and possibly (in your words) "wiped out" where the index basically tweaks itself then continues on?

If the retirees are going to be "ruined", don't you think other big holders are going to share the pain?


Cheers


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## james4beach (Nov 15, 2012)

Eclectic12 said:


> In what scenario is the bank equity wiped out where XIU and XIC chug merrily along?


USA. This was just 8 years ago.

Previous to the collapse, US financials peaked at a massive 23% of the S&P 500. Then their financial sector was destroyed and bank equity was wiped out. XLF fell to a mere fraction of what it used to be; even years later, it's below its old high. Anybody who heavily invested in bank shares (say a portfolio of Citigroup, Bank of America, etc) was wiped out.

However, people who invested via broader indices like SPY came through it all due to more diversified exposure. Of course they saw declines at the time but I'm talking about recovery -- coming through it in the long term. SPY recovered very nicely. Bank shares did not! Financials dropped to like 10% sector weight.

Is this not a good parallel for Canadian financials and XIU ?

Additionally, we don't need a global collapse for all of this to unfold. We just need a serious real estate bear market in Canada.


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## james4beach (Nov 15, 2012)

And here's a picture: XLF vs SPY. I expect this to happen in Canada too (banking sector vs broad TSX)
http://tinyurl.com/hp2jlrs

The point here is that bank equity was wiped out. Over time, the broad index fared much better. This is why I think XIU/XIC is a fine way to go for long term investment, even for someone like me who is bearish on financials.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> USA. This was just 8 years ago.
> 
> Previous to the collapse, US financials peaked at a massive 23% of the S&P 500. Then their financial sector was destroyed and bank equity was wiped out. XLF fell to a mere fraction of what it used to be; even years later, it's below its old high. Anybody who heavily invested in bank shares (say a portfolio of Citigroup, Bank of America, etc) was wiped out ...
> 
> Is this not a good parallel for Canadian financials and XIU ?


I must have misunderstood ... I thought you were of the opinion that the market manipulation the US engaged in meant that the "recovery" was smoke and mirrors.

So no ... I don't see it as a good parallel.


Cheers


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## Pluto (Sep 12, 2013)

james4beach said:


> And here's a picture: XLF vs SPY. I expect this to happen in Canada too (banking sector vs broad TSX)
> http://tinyurl.com/hp2jlrs
> 
> The point here is that bank equity was wiped out. Over time, the broad index fared much better. This is why I think XIU/XIC is a fine way to go for long term investment, even for someone like me who is bearish on financials.


Yes, some US bank equity got wiped out. I think Citi did a 50-1 reverse split, or was it 20-1. Anyway, a lot of equity vanished. And your view is that will happen to CDN banks too. But it isn't clear to me why you predict that. Why must CDN banks go the way of Cii and BoA?


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## gibor365 (Apr 1, 2011)

james4beach said:


> And here's a picture: XLF vs SPY. I expect this to happen in Canada too (banking sector vs broad TSX)
> http://tinyurl.com/hp2jlrs
> 
> The point here is that bank equity was wiped out. Over time, the broad index fared much better. This is why I think XIU/XIC is a fine way to go for long term investment, even for someone like me who is bearish on financials.


Comparison between SPY and XIU doesn't make a lot of sense.... S&P500 allocation to: financials 10-12%, energy 12-13%, materials 3% and XIU respectively 34, 20, 13 

add to your chart XLE and see how it did during big recession


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## james4beach (Nov 15, 2012)

Pluto said:


> And your view is that will happen to CDN banks too. But it isn't clear to me why you predict that. Why must CDN banks go the way of Cii and BoA?


Citi/BoA are the worst case scenario, but in general I think Canadian bank equity is at above-historical risk, because

(1) the Canadian government has verbalized that future banking problems will be handled with bail-ins, meaning creditors and equity holders share losses
(2) when banks raise more capital they inevitably dilute their equity
(3) Canada is in a very strong credit boom. Inevitably the credit cycle involves a slowdown or bust.
(4) overheated real estate markets generally end with banking losses / problems
(5) Canadian banks are same as any other global bank and exposed to global financial problems - in addition to Canadian R.E. bubble
(6) our very long real estate bull market, and the misperception that "we had no problems in 2008" has led to widespread complacency and fearlessness

Will the "bust" ever play out? When? How severe will it be? I don't know, and I still think XIU/XIC is a good way to maintain long term Canadian equity exposure. What I would not do is over-weight financials, or load up on bank stocks just for the dividends... e.g. XDV is 57% financials, which I think is irresponsible.


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## mordko (Jan 23, 2016)

^ Generally agree, except that Canadian banks are not quite the same as American or European ones. They have a large moat in Canada and a very high entry barrier for foreign competitors. HSBC tried, now they are pulling out. As a result of little competition, they don't have to take as many risk and can keep increasing prices while cutting costs. 

So, I find it hard to see the 2009 Armageddon scenario for Canadian banks. 

Yet there are clouds on the horizon in the form of small and nimble internet banks, pissed off clients and increased government regulations.


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## gibor365 (Apr 1, 2011)

> HSBC tried, now they are pulling out.


 Same with Citi. I worked for them several years, until they sold our department.... now they practically ran away from Canada.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> Citi/BoA are the worst case scenario, but in general I think Canadian bank equity is at above-historical risk, because ...


So if I understand correctly, between the high leverage and other high risk investments plus the risks you list then ...

XDV at something like 57% financials is irresponsible (which I assume means avoid it).
XIU at something like 38% financial is good exposure because the rest of the index will deal with any lost shareholding equity without a complete wipeout.
Bank shares should be avoided like the plague.

Is this correct?


Cheers


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## Pluto (Sep 12, 2013)

james4beach said:


> Citi/BoA are the worst case scenario, but in general I think Canadian bank equity is at above-historical risk, because
> 
> (1) the Canadian government has verbalized that future banking problems will be handled with bail-ins, meaning creditors and equity holders share losses
> (2) when banks raise more capital they inevitably dilute their equity
> ...


Regarding your point 1. That's the same for any company. There is no guarantee for any company getting any bail out. So I don't see why it is a condition special to banks. 

Point 2. You seem to say that if a bank raises capital to expand by for example, by buying a bank in the US or Mexico, that will be bad. The venture is doomed to failure and so the equity is diluted. But if a pipeline raises equity to buy a pipeline in the US that is good and just business. So I'm not really following your idea of inevitable dilution regarding banks vs other types of businesses. How is the equity diluted if the raised equity is used to expand the business and increase earnings?


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## Nelley (Aug 14, 2016)

Pluto said:


> Regarding your point 1. That's the same for any company. There is no guarantee for any company getting any bail out. So I don't see why it is a condition special to banks.
> 
> Point 2. You seem to say that if a bank raises capital to expand by for example, by buying a bank in the US or Mexico, that will be bad. The venture is doomed to failure and so the equity is diluted. But if a pipeline raises equity to buy a pipeline in the US that is good and just business. So I'm not really following your idea of inevitable dilution regarding banks vs other types of businesses. How is the equity diluted if the raised equity is used to expand the business and increase earnings?


The big 5 Canadian banks are not just "companies"-Royal Bank isn't Husky-these entities are so influential they could be considered hybrids between companies and government entities. Look-there are still people arguing that all the money they got in 2008 was not technically a "bailout". So if you are going to look at their future you have to know the political side also-any rules can be changed at any time.


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## Pluto (Sep 12, 2013)

Nelley said:


> The big 5 Canadian banks are not just "companies"-Royal Bank isn't Husky-these entities are so influential they could be considered hybrids between companies and government entities. Look-there are still people arguing that all the money they got in 2008 was not technically a "bailout". So if you are going to look at their future you have to know the political side also-any rules can be changed at any time.


What makes it inevitable that a bank's equity will be diluted, where as non-bank equity won't? 
Is your argument this: Banks are hybrids between companies and government entities, therefore dilution of the equity is inevitable? But non- bank companies are not hybrids, therefore the dilution of their equity is not inevitable. 

I don't really follow this.


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## Nelley (Aug 14, 2016)

Pluto said:


> What makes it inevitable that a bank's equity will be diluted, where as non-bank equity won't?
> Is your argument this: Banks are hybrids between companies and government entities, therefore dilution of the equity is inevitable? But non- bank companies are not hybrids, therefore the dilution of their equity is not inevitable.
> 
> I don't really follow this.


No what I am saying is because of their political power it is difficult to predict their future stock performance-look-in 2008 they got lots of help-what if the subsidy they received in 2008 was only 33% of what they actually got-then their stock performance would have been very different.


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## james4beach (Nov 15, 2012)

Eclectic12 said:


> So if I understand correctly . . .
> XDV at something like 57% financials is irresponsible (which I assume means avoid it).
> XIU at something like 38% financial is good exposure because the rest of the index will deal with any lost shareholding equity without a complete wipeout.


Both would get hit hard in a banking slowdown, but as with the US case, it's likely that XIU would recover better than something that's heavier in financials. XIC has slightly more diversified exposure, so I'd be even more hopeful for it.

If we had another benchmark ETF with broader sector diversification, I'd say that would be superior. But we don't have such a thing, so I fall back to XIC.



> Bank shares should be avoided like the plague.
> 
> Is this correct?


No, I'm just saying you shouldn't expose yourself excessively to the sector.

What's so controversial about this?
- In the late 90s, you should have limited exposure to the sector that ballooned (tech)
- In 2003-2006, you should have limited exposure to the sector that grew to be giant (US financials)
- Now in Canada, after a massive boom in housing & credit, limit exposure to the giant sector (Canadian banks)

It's just common sense. My recommendation is that you don't concentrate exposure into Canadian bank stocks, like holding XIU and then additionally buying bank shares "for the dividends"


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## canew90 (Jul 13, 2016)

james4beach said:


> Both would get hit hard in a banking slowdown, but as with the US case, it's likely that XIU would recover better than something that's heavier in financials. XIC has slightly more diversified exposure, so I'd be even more hopeful for it.
> 
> If we had another benchmark ETF with broader sector diversification, I'd say that would be superior. But we don't have such a thing, so I fall back to XIC.
> 
> ...


I hold 30% in Cdn banks and wish I held more. Glad I don't own any etf's, but each to their own investment strategy.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> Eclectic12 said:
> 
> 
> > Bank shares should be avoided like the plague.
> ...


 ... because as soon as bank shares are being written about - the "expose excessively" criteria seems to disappear.

Being locked into a 30+% exposure is okay as there is other stuff built in but where the individual investor is selecting themselves (i.e. buying bank stock), there is no mention of exposure. It's all about " ... nobody's going to talk me into holding equity in a 30:1 leveraged hedge fund with $13 trillion in derivatives off balance sheet (and that's just RBC)" or " ... I've tried pretty hard to minimize my exposure to bank stocks over the years."

If it really is about excessive exposure - the investment vehicle should not matter, simply the exposure.




james4beach said:


> My recommendation is that you don't concentrate exposure into Canadian bank stocks, like holding XIU and then additionally buying bank shares "for the dividends"


Then I'd suggest a bit more balance would help.

Stating that banks are bad investments that one is avoiding while happily lining up to buy a significant exposure in the basket is confusing, not to mention contradictory.


Cheers


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## gibor365 (Apr 1, 2011)

> Stating that banks are bad investments that one is avoiding while happily lining up to buy a significant exposure in the basket is confusing, not to mention contradictory.


 many people mentioned the same point 
I'm just curious which stocks in XIU james like (obviously except financials)?!


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## james4beach (Nov 15, 2012)

Eclectic12 said:


> If it really is about excessive exposure - the investment vehicle should not matter, simply the exposure.
> . . .
> Stating that banks are bad investments that one is avoiding while happily lining up to buy a significant exposure in the basket is confusing, not to mention contradictory.


Right, my concern is excessive exposure. I can live with XIC's exposure because the past has shown that indices survive and thrive just fine even when they carry a large weight that becomes a problem. Think of how big Nortel was in the TSX, and still how well XIU has performed since inception... surely that shows that indexing is resilient.

I still wish that XIC had less than 34% financial exposure, but I don't really have a choice here. XIU and XIC are fine vehicles and on the balance of things, I still think you win more by sticking with the index long term.

I am doing some tangible things to reduce my own financial exposure, which is consistent with what I've said here about seeking to go lighter on banks:

- strongly considering ZLB, as it has good sector diversification and only 25% financials
- pursuing my DIVZ stock portfolio, which is under-weight financials


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## canew90 (Jul 13, 2016)

james4beach said:


> Right, my concern is excessive exposure. I can live with XIC's exposure because the past has shown that indices survive and thrive just fine even when they carry a large weight that becomes a problem. Think of how big Nortel was in the TSX, and still how well XIU has performed since inception... surely that shows that indexing is resilient.
> 
> I still wish that XIC had less than 34% financial exposure, but I don't really have a choice here. XIU and XIC are fine vehicles and on the balance of things, I still think you win more by sticking with the index long term.
> 
> ...


If your paranoid about financials, stick to individual stocks, then you don't have to hold any financials. Suggesting an index with even 25% financials seems to go against the concerns you've expressed.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> Right, my concern is excessive exposure. I can live with XIC's exposure because the past has shown that indices survive and thrive just fine even when they carry a large weight that becomes a problem. Think of how big Nortel was in the TSX, and still how well XIU has performed since inception... surely that shows that indexing is resilient.


As I've mentioned before ... I preferred to have almost none then buy at the $3 mark but to each their own.




james4beach said:


> I am doing some tangible things to reduce my own financial exposure, which is consistent with what I've said here about seeking to go lighter on banks:
> 
> - strongly considering ZLB, as it has good sector diversification and only 25% financials
> - pursuing my DIVZ stock portfolio, which is under-weight financials


The amount said about the risk and little said about the other moves seems to be drowning out the mitigations, IMO.




canew90 said:


> If your paranoid about financials, stick to individual stocks, then you don't have to hold any financials. Suggesting an index with even 25% financials seems to go against the concerns you've expressed.


Individual stocks seems the most effective way to avoid/cut the risk but it seems that it is one method that is off the table. I guess this is part of what confuses me.


Cheers


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## canew90 (Jul 13, 2016)

Eclectic12 said:


> Individual stocks seems the most effective way to avoid/cut the risk but it seems that it is one method that is off the table. I guess this is part of what confuses me.
> Cheers


There is no perfect or right method, however, by owning individual stocks rather than etf's, I avoid cyclical and other stocks which I don't wish to own. Those that want to own the entire market or index should buy the index and don't complain about specific sectors.


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## Nelley (Aug 14, 2016)

canew90 said:


> There is no perfect or right method, however, by owning individual stocks rather than etf's, I avoid cyclical and other stocks which I don't wish to own. Those that want to own the entire market or index should buy the index and don't complain about specific sectors.


You are also avoiding the fees which add up over time.


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## mordko (Jan 23, 2016)

Nelley said:


> You are also avoiding the fees which add up over time.


Which is crucial when mutual finds charge 2 percent per year. Not a big deal with ETFs charging 0.05 percent.


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## james4beach (Nov 15, 2012)

Eclectic12 said:


> Individual stocks seems the most effective way to avoid/cut the risk but it seems that it is one method that is off the table. I guess this is part of what confuses me.


But *I am* pursuing a strategy to use individual stocks and reduce financial sector exposure. It's fully documented in my DIVZ thread.
http://canadianmoneyforum.com/showthread.php/49914-Tracking-my-non-dividend-portfolio-DIVZ

By the screening process, those portfolios end up with minimal financial exposure. Since the start of my experiment the stock picks have matched the TSX, but have been extremely volatile. It's an ongoing experiment and I'm trying to refine my methodology.



> Suggesting an index with even 25% financials seems to go against the concerns you've expressed.


The benchmark index ETFs do a good job and they're tough to beat. As I try my own stock picking approach (currently 0% financial exposure), I keep comparing back to XIC as my benchmark.

At the end of the day, what can you suggest to someone? XIC really is about the best idea for Canadian stock investment. I'm trying to find a way to do better. Since I have not yet even proved to myself that my own method is better, I continue to say XIC is the best way.

You guys seem to get caught up on the fact that I recommend the best vehicle I know of (XIU / XIC), while I have some doubts and concerns about some aspects of it. There are many aspects of the index ETFs that I also like -- as I said before, they prove to be resilient over time even if they are over-weight the wrong sector. There are a lot of great things about TSX index ETFs.

Or to put it more bluntly, XIC is the best we have. Not perfect, but the best that we have.



> Suggesting an index with even 25% financials seems to go against the concerns you've expressed.


Let's revisit this criticism. Someone in the late 90s tech boom might have said that SPY is a good way to invest in US stocks long term. They would hear the same criticism you're telling me, word for word. Sure, at the time the tech weighting was way too high. Was that a short-term problem? Definitely! But the long term returns are still very good. You might have just been prudent to not seek any higher tech exposure than you already got in SPY. *That's all I'm saying here*... I still think it's a very straightforward message


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## Eclectic12 (Oct 20, 2010)

canew90 said:


> There is no perfect or right method, however, by owning individual stocks rather than etf's, I avoid cyclical and other stocks which I don't wish to own ...


Where one wants less exposure to Canadian banks than the index provides - one is forced to buy individual stocks, is not?

If it is an ETF, what "anti-Canadian Bank" etf can one use to counter the index's percentage?


Cheers


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> But *I am* pursuing a strategy to use individual stocks and reduce financial sector exposure. It's fully documented in my DIVZ thread.
> http://canadianmoneyforum.com/showthread.php/49914-Tracking-my-non-dividend-portfolio-DIVZ
> 
> By the screening process, those portfolios end up with minimal financial exposure. Since the start of my experiment the stock picks have matched the TSX, but have been extremely volatile. *It's an ongoing experiment * and I'm trying to refine my methodology ...


It's a strategy now?

I didn't realise that it was no longer an experiment.




james4beach said:


> At the end of the day, what can you suggest to someone?


Same as you ... stock picking ... though I am less worried about bank equity disappearing overnight.




james4beach said:


> ... You guys seem to get caught up on the fact that I recommend the best vehicle I know of (XIU / XIC) ...


 ... while you gloss over the jarring contrast of "investing in Canadian banks are bad" with "buy this good index that has a sizeable chunk of the bad investment".




james4beach said:


> ... while I have some doubts and concerns about some aspects of it.


Like the "it's the amount exposure" - there's so little mention of doubt that I'd have re-read to see if it was expressed versus lots of time outlining the risks etc.





james4beach said:


> ... Or to put it more bluntly, XIC is the best we have. Not perfect, but the best that we have.


And to put it bluntly - picking individual stock can let you set the amount of bank exposure to whatever you want.




james4beach said:


> Eclectic12 said:
> 
> 
> > Suggesting an index with even 25% financials seems to go against the concerns you've expressed.
> ...


It's your comment that Canadian banks are a bad investment, over leveraged that "*nobody's going to talk me into holding equity*" versus the ETF you are recommending and presumably have bought, which forces holding what the investment you don't want.

If there's criticism here - it's self-criticism. 


Cheers


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## agent99 (Sep 11, 2013)

James - Might be time to move on to something new. We Canadians love our banks


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## Oldroe (Sep 18, 2009)

If you think XI anything will recover before the banks you are delusional.


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## james4beach (Nov 15, 2012)

agent99 said:


> James - Might be time to move on to something new. We Canadians love our banks


It's easy to love a sector during its bull phase.


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## mordko (Jan 23, 2016)

The point that James made seems rather obvious, I am surprised to see so much resistance.

Unless your name is Buffett, diversification is a good thing. And even Buffett is diversified these days. Canadian stockmarket is very concentrated in just a few sectors. Why would one reduce diversification even further? Guess the only way to reduce ones risk if you focus on Canadian banks and utilities would be to make sure you have a lot of foreign holdings in other industries.


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## agent99 (Sep 11, 2013)

mordko said:


> The point that James made seems rather obvious, I am surprised to see so much resistance.


The resistance is likely because he suggests avoiding the banks, but also suggests buying a TSX etf. The TSX is largely made up of financials, energy and materials. If the banks are not good, what is there to like about the other two?

Regarding other industries, we do have telecoms, health care, real estate, global engineering/construction and several other choices right here in Canada that along with banks and utilities can make for a diversified portfolio. Some offshore content may be added, but have to be wary of changes in exchange rates or hedge.


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## mordko (Jan 23, 2016)

OK, imagine a half point interest rate rise in Canada. How do you think it will impact Canadian REITs? And what would happen to the banking stocks if real estate were to crash? And what happens to telecoms when interest rates go up? Healthcare? Are you thinking something like VRX? Do engineering companies pay large dividends? Something like BBD?


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## mrPPincer (Nov 21, 2011)

I don't see the critics here suggesting anything significantly different than what James is, buy the index, plus maybe buy a few solid CDN stocks in the underrepresented sectors to increase sector diversification within the CDN market and see how it goes.

That's how I've been trying to do it for the CDN portion, & being overweighted Canada for the div tax benefits, if building a less _sector_ overweighted CDN portion of the total portfolio helps reduce stress, why not?


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## agent99 (Sep 11, 2013)

mordko said:


> OK, imagine a half point interest rate rise in Canada. How do you think it will impact Canadian REITs? And what would happen to the banking stocks if real estate were to crash? And what happens to telecoms when interest rates go up? Healthcare? Are you thinking something like VRX? Do engineering companies pay large dividends? Something like BBD?


My oh my - the end of the world in nigh


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## mordko (Jan 23, 2016)

I am not sure an increase in interest rates and a drop in Canadian house prices are exactly like the end of world. Or that the probabilities are of the same order of magnitude.


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## AltaRed (Jun 8, 2009)

Perhaps a correction in the order of 10%, maybe a bit more in interest rate sensitive stocks, especially those with a large debt component.


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## canew90 (Jul 13, 2016)

Corrections are a normal part of stock market investing. What causes the correction, their severity and when is unknown but why make a big issue about it. They will happen and the rule is to try to take advantage of them by not panicking, add to your positions rather than sell and hopefully you are not relying upon capital gains when the correction occurs. I expect my income from holding will continue to rise even during a drop of 10% to 20%.


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## mordko (Jan 23, 2016)

^ Under several plausible scenarios corrections in a portfolio containing a highly correlated subset of dividend Canadian stocks could be severe. Long-term growth prospects could be lowered due to the current popularity and the resulting overevaluation of such stocks.


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## agent99 (Sep 11, 2013)

We buy Canadian dividend paying stocks to provide tax efficient cash flow. If the markets correct, it makes little difference. Just keep collecting the dividends and any interest from fixed income safety net we have. Even in the worst corrections, dividends have hardly changed. I will be happy if interest rates go up. Maybe then we will be able to buy 5% 5yr GICs again.

Those still building their nest eggs may see things differently, but I don't worry much about the market value of our portfolio.


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## mordko (Jan 23, 2016)

And that's just wrong. What really matters isn't the dividend but return on investment. Stocks are not GICs and dividends are in no way guaranteed. Past performance and all that.


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## canew90 (Jul 13, 2016)

mordko said:


> And that's just wrong. What really matters isn't the dividend but return on investment. Stocks are not GICs and dividends are in no way guaranteed. Past performance and all that.


So we should ignore the fact that our dividends are 2.5 times our expenses, because its ROI that's important? To me our dividends are our returns and we care zip about the value of our portfolio. Whether the the value goes up or down has not affected the growth of our income over the 10 years of our retirement!


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## Nelley (Aug 14, 2016)

mordko said:


> And that's just wrong. What really matters isn't the dividend but return on investment. Stocks are not GICs and dividends are in no way guaranteed. Past performance and all that.


You're wrong-a cash dividend is of higher quality than the capital gain from a price increase simply because the element of uncertainty is far lower. This is the reason why tons of small fry have done very well over the years with dividend paying equities-it is simply easier than trying to predict price movements.


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## james4beach (Nov 15, 2012)

> To me our dividends are our returns and *we care zip about the value of our portfolio*


That's a mistake in reasoning that's been very popular in the last few years. You might want to start with this article; it took me a while to wrap my head around it too
http://www.moneysense.ca/magazine-archive/the-income-illusion/

To quickly illustrate the problem with this, imagine that you give me $100,000 and I agree to pay you $7,000 a year in cash (an incredible 7% yield). Let's say I just put your cash in a savings account, and draw out what is necessary to pay you the $7,000 yearly.

You might then talk about how steady that payment is and how you love the reliability and predictability of that $7,000/yr

With your current thinking, you'd say that all you care about is the $7,000 and you don't care what's happening to your principal amount.


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## Nelley (Aug 14, 2016)

james4beach said:


> That's a mistake in reasoning that's been very popular in the last few years. You might want to start with this article; it took me a while to wrap my head around it too
> http://www.moneysense.ca/magazine-archive/the-income-illusion/
> 
> To quickly illustrate the problem with this, imagine that you give me $100,000 and I agree to pay you $7,000 a year in cash (an incredible 7% yield). Let's say I just put your cash in a savings account, and draw out what is necessary to pay you the $7,000 yearly.
> ...


Look James-when you buy a stock you are buying a small ownership position in the company-does it make sense that everybody gets paid cash money on a regular basis but you as an owner get paid ZERO? If capital gain is everything, then management should defer all their wages also-doesn't that sound fair to you?


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## TomB19 (Sep 24, 2015)

The whole premise of this thread is ridiculous. Dividend stocks need no defense. They are terrible.

Everyone should sell their productive assets so I can go on a discount buying spree.


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## TomB19 (Sep 24, 2015)

james4beach said:


> That's a mistake in reasoning that's been very popular in the last few years.


Not necessarily.

I own a pretty big jag of DRG-UN. It's not doing terribly well but I picked up most of it at $8.25 at the end of 2013 plus a little bit more at $9.10 this year. It's been paying more than 9% for quite a while. It will have paid back my entire stake in a few years.

I wouldn't say I don't care about the price but I purchased it to do something specific and it is doing an outstanding job for me. To say I'm delighted with the performance so far would be an understatement.

While you're fixated on capital gains, I'm buying value stocks several times per year with the inflows into my RRSP from various sources, not the least of which is corporate distributions.


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## mordko (Jan 23, 2016)

Nelley said:


> Look James-when you buy a stock you are buying a small ownership position in the company-does it make sense that everybody gets paid cash money on a regular basis but you as an owner get paid ZERO? If capital gain is everything, then management should defer all their wages also-doesn't that sound fair to you?


Nobody said "capital gain is everything". Blooming obvious that it isn't "everything". Total return is "everything". 

And total return is dependent on future profits of the company you invest in. If profits don't grow in the one or two major industries which everyone buys as "dividend stocks" then your income will suffer. And yes, they can borrow or stop investing just to keep up their dividend payments for a while. That will simply ensure that you will suffer bigger losses at a future time.


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## canew90 (Jul 13, 2016)

james4beach said:


> That's a mistake in reasoning that's been very popular in the last few years. You might want to start with this article; it took me a while to wrap my head around it too
> http://www.moneysense.ca/magazine-archive/the-income-illusion/
> 
> To quickly illustrate the problem with this, imagine that you give me $100,000 and I agree to pay you $7,000 a year in cash (an incredible 7% yield). Let's say I just put your cash in a savings account, and draw out what is necessary to pay you the $7,000 yearly.
> ...


Accept that my income goes up each year without me putting in any additional funds. I never need to draw capital, though it has continued to rise in value when I have taken the time to check. Even during 2008/2008 when the capital value did drop considerably, my income rose from the previous and has continued in the same direction. Wheres my mistake?


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## Nelley (Aug 14, 2016)

mordko said:


> Nobody said "capital gain is everything". Blooming obvious that it isn't "everything". Total return is "everything".
> 
> And total return is dependent on future profits of the company you invest in. If profits don't grow in the one or two major industries which everyone buys as "dividend stocks" then your income will suffer. And yes, they can borrow or stop investing just to keep up their dividend payments for a while. That will simply ensure that you will suffer bigger losses at a future time.


Sure-total return is "everything" if you have the patented Mordko Crystal Ball ($9.95 at Walmart)-the reality (like I stated) is that an actual cash dividend is only comparable to a capital gain IN HINDSIGHT. Look-if you already know where all equity prices are going why waste your time with cash dividends?


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## canew90 (Jul 13, 2016)

james4beach said:


> That's a mistake in reasoning that's been very popular in the last few years. You might want to start with this article; it took me a while to wrap my head around it too
> http://www.moneysense.ca/magazine-archive/the-income-illusion/


Reviewed the article and it just doesn't quite work they way they suggest. for example they quote:
"The idea that retirees should live off the income from their portfolios without dipping into principal goes back a long way. It made sense in the 1980s and 1990s, when 10-year government bonds yielded 9% or 10%, and inflation was less than half that rate. Today, only the wealthiest Canadians can hope to pull this off. “For most people it’s an unrealistic expectation that you can live purely off income over a long period,” says Dan Hallett of HighView Financial Group. “I just don’t think that most people will have saved enough to do that.”
A more realistic approach is to use a strategy that generates cash flow using a combination of bond interest, dividends and a dollop or two of principal. After all, that’s exactly what you do when you buy an annuity: you turn a lump sum into a regular stream of income that will last throughout your lifetime, but isn’t expected to last for eternity. Depending on the risk you’re willing to take, the size of your nest egg, and how long you live, this approach should allow a withdrawal rate of about 4% to 6% for 30 years or more. If you keep to the lower end of that range, you should be able to increase your withdrawals each year to keep pace with inflation.
But how do you manage the process? Portfolio manager Steve Lowrie sets aside a cash reserve covering three years’ worth of expenses, and clients use this account for their regular cash flow. The rest of the portfolio is invested in a globally diversified blend of stocks and bonds. When it’s gone up in value, he takes some profits and replenishes the cash reserve. The three-year buffer usually gives him enough time to ride out market volatility. “This was really helpful during 2008–09,” he says, “because my clients could meet their cash flow needs and ignore the rest of the portfolio. Then when things rebounded, I rebalanced by selling stocks. It gives you a lot of flexibility.”
Hallett likes that approach too, but warns investors it can be difficult to manage without an adviser. “This total-return approach is a bit more high-maintenance, but realistically it’s the best way to address cash-flow needs. There’s a little bit of timing involved, because you want to replenish that short-term account when your other assets are on a bit of a high. Just don’t get hung up on the timing: it doesn’t need to be perfect.”

The thing is if one invests over time with the objective of generating Income from their portfolio, say over a period of 15 - 20 years and when they retire, their portfolio is generating sufficient income to meet their needs, why would they want to then consider the recommendation above? Even if the income does not exceed their needs, are they any worse off? They are still in the position to sell some of their capital. Using my approach they will probably have generated more income than with the above and will have no annual fees, even if small reducing their income. I'm not wealthy and manage to live off my income.


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## mordko (Jan 23, 2016)

I don't need to know future capital gains, although it would be nice. I just need to know that future profits will vary by industry, and that the banks and the utilities and the REITs have had it pretty damn good for a while and that everything is cyclical. And for this reason I want to diversify rather than to ensure all my assets are concentrates in a few correlated industries just because they are popular right now.


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## Nelley (Aug 14, 2016)

canew90 said:


> Reviewed the article and it just doesn't quite work they way they suggest. for example they quote:
> "The idea that retirees should live off the income from their portfolios without dipping into principal goes back a long way. It made sense in the 1980s and 1990s, when 10-year government bonds yielded 9% or 10%, and inflation was less than half that rate. Today, only the wealthiest Canadians can hope to pull this off. “For most people it’s an unrealistic expectation that you can live purely off income over a long period,” says Dan Hallett of HighView Financial Group. “I just don’t think that most people will have saved enough to do that.”
> A more realistic approach is to use a strategy that generates cash flow using a combination of bond interest, dividends and a dollop or two of principal. After all, that’s exactly what you do when you buy an annuity: you turn a lump sum into a regular stream of income that will last throughout your lifetime, but isn’t expected to last for eternity. Depending on the risk you’re willing to take, the size of your nest egg, and how long you live, this approach should allow a withdrawal rate of about 4% to 6% for 30 years or more. If you keep to the lower end of that range, you should be able to increase your withdrawals each year to keep pace with inflation.
> But how do you manage the process? Portfolio manager Steve Lowrie sets aside a cash reserve covering three years’ worth of expenses, and clients use this account for their regular cash flow. The rest of the portfolio is invested in a globally diversified blend of stocks and bonds. When it’s gone up in value, he takes some profits and replenishes the cash reserve. The three-year buffer usually gives him enough time to ride out market volatility. “This was really helpful during 2008–09,” he says, “because my clients could meet their cash flow needs and ignore the rest of the portfolio. Then when things rebounded, I rebalanced by selling stocks. It gives you a lot of flexibility.”
> ...


Re financial advisers: Lets say you pay a guy 1% of AUM-he is likely buying ETFs (sometimes even mutual funds!!)-so lets say all fees in totals 1.5% AUM-if you expect 7% yearly return you are paying almost 22% of expected return in fees! Studies have shown that the average 401K in the USA loses 35-40% in fees over the long run! They state 1.5% because if sounds small/benign-can you imagine the response if the guy said we take about 22% per annum of your expected return?


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## mordko (Jan 23, 2016)

Canew, in analyzing the article and claiming you can live off income, you missed the key words: " over a long period".


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## AltaRed (Jun 8, 2009)

mordko said:


> Canew, in analyzing the article and claiming you can live off income, you missed the key words: " over a long period".


Canew is stuck in the ruts with only one answer...his situation. You are wasting your time.

FWIW, I agree with you that continued increases in corporate profitability are required to sustain both share prices and divideng growth. When corporate growth stalls, dividends are sustained for awhile and then the house of cards comes tumbling down.


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## Eder (Feb 16, 2011)

The thing is good companies worth owning generally pay and increase their dividends. Nice way to avoid the riff raff and ensure a nice retirement for yourself....not some analyst.


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## canew90 (Jul 13, 2016)

AltaRed said:


> Canew is stuck in the ruts with only one answer...his situation. You are wasting your time.
> 
> FWIW, I agree with you that continued increases in corporate profitability are required to sustain both share prices and divideng growth. When corporate growth stalls, dividends are sustained for awhile and then the house of cards comes tumbling down.


Guess you are correct. But I' was by no means a great investor and if I can do it I believe others can as well. Nor do I suggest its the only way to invest, it just worked for me. Besides too often opinions are made by those who have not yet achieved their goal. Lets hear from those who have and how they got there (without DB Pensions).


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## agent99 (Sep 11, 2013)

canew90 said:


> Lets hear from those who have and how they got there (without DB Pensions).


Mordko say I am wrong! I don't think so. We have lived comfortably off income from our investments plus CPP/OAS for past 14 years.No other pension. Initially we saw our portfolio grow by 50%. Then in recession saw it drop back to almost where it was initially. Then increase by 50% again. In the meantime, cashflow from our investments was not impacted and in fact increased. Portfolio value has increased by about 4%pa after making withdrawals of ~4.5%pa. Total return is important, but dividend stocks provide income NOW rather than rely on the time frame that growth stocks require to perform well. In retirement, we don't have time to wait!


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## james4beach (Nov 15, 2012)

Your money/estate won't last as long as it could if you only worry about the income. Personally I want my money to last as long as it possibly can -- that's why total return matters. Let's say you have $1 million and you want to live off this in your retirement years. This means that you need it to last.

Say there are two investment options, A and B

A: standard TSX Composite with dividends, returns 3% divs + 4% cap = 7% total return
B: produces high/growing dividend income, returns 4% divs + 1% cap = 5% total return

Which is the better investment? Which makes your life better?

During these last few years of dividend excitement, I've been seeing all kinds of investments popping up that show exactly this tradeoff. Income Trusts were an example of that too... very high on the current income at the detriment of the ability to produce long term total return. Now we have things like covered call ETFs and other exotic income ETFs that are all of the "B" variety.

One vivid example: ZDV. Sounds attractive: they have a methodology to pick stocks that have strong dividends and a history of growing dividends. 3 year return of 4.8% vs 8.0% for the TSX.

If you can pick a portfolio of stocks that produce strong dividends, and perform as well as the TSX Composite total return, then great. No downside to that! But please benchmark yourself against the TSX Composite. If your high dividend stock picks are not matching XIC in the long term, then you're not doing yourself any good.


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## Nelley (Aug 14, 2016)

james4beach said:


> Your money/estate won't last as long as it could if you only worry about the income. Personally I want my money to last as long as it possibly can -- that's why total return matters. Let's say you have $1 million and you want to live off this in your retirement years. This means that you need it to last.
> 
> Say there are two investment options, A and B
> 
> ...


We all want to maximize total return, however a bird in the hand is worth two in the bush.


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## agent99 (Sep 11, 2013)

james4beach said:


> Say there are two investment options, A and B
> 
> A: standard TSX Composite with dividends, returns 3% divs + 4% cap = 7% total return
> B: produces high/growing dividend income, returns 4% divs + 1% cap = 5% total return
> ...


Why would you compare apples and oranges? Why not:

A: Selection of stocks with some dividends, returns 2% divs + 5% CG = 7% total return
B: Selection with higher and growing dividends returns 4% divs + 3% CG = 7% total return

I would choose B because we get the dividends now and have no crystal ball to advise whether or not the CGs will in fact materialize.


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## mordko (Jan 23, 2016)

This has been a useful discussion. It shows that people never learn. Or rather they learn but only from the last battle, not thinking about the next one. And that wrapping is always more importent than the content.


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## Eder (Feb 16, 2011)

Well I am in the retired camp...pulled the pin at 53....7 years living on dividends only...I guess we are all morons and will soon be on the bread line...hope there is one in the South Seas...


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## doctrine (Sep 30, 2011)

agent99 said:


> Why would you compare apples and oranges? Why not:
> 
> A: Selection of stocks with some dividends, returns 2% divs + 5% CG = 7% total return
> B: Selection with higher and growing dividends returns 4% divs + 3% CG = 7% total return
> ...


I prefer a more basic approach in the style of Graham: look for companies with good management and a history of good business decisions in a good industry with growing revenue and net earnings over time, trading at a reasonable valuation and paying out a portion in dividends while retaining a portion for reinvestment. It's not rocket science and has been working for decades if not nearly a century. 

For example, said company with a P/E of 15 and paying 60% of net earnings in dividends will by definition have a 4% yield while being able to re-invest the equivalent of 2.6% of the market capitalization back into the business, reinforcing the ability of the company to grow the business and pay an even higher dividend in the future. 

If all of that doesn't work for you, you are definitely better off in a fund tracking the index. I have done exceedingly well against the Canadian index which isn't that unusual, although I continue to use the S&P 500 index funds for US exposure as it is historically much harder to beat.


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## mordko (Jan 23, 2016)

^that's not quite what Graham says. The Intelligent Investor has a whole chapter on dividends. Graham quotes a bunch of examples and cites the opposing views. His own view comes at the end of the chapter:

Management should either:

1. Pay a decent dividend, e.g. 2/3 of earnings or
2. Demonstrate that reinvestments have produced an adequate increase in per share earnings.


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## canew90 (Jul 13, 2016)

james4beach said:


> Your money/estate won't last as long as it could if you only worry about the income.


Altared says I'm stuck in a rut, but you must have earplugs or eye mask on!

If we live totally (actually only needing a portion) on the income we receive, NEVER touching capital, how do we end up running out of money? 

Another point I question is Market Returns. If you have $500,000 invested and the market returns 10% this year then down 10% next year, over the two years your capital is valued at $495,000. If the same investment receives 4% dividends I receive $20,000, next year my dividends grow by say 2.5% so I receive $20,500 even though my market value dropped t $495,500. Sure if we own the same stocks ok, but what if your portfolio depends upon market returns, rather than income?


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## mordko (Jan 23, 2016)

^ you seem to be missing the part that by buying shares you become an owner of the company. You seem to treat shares as you would a GIC.


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## mordko (Jan 23, 2016)

How do you run out of money? Easy. Dividends are not guaranteed. Company profits plunge and you are screwed.


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## canew90 (Jul 13, 2016)

mordko said:


> ^ you seem to be missing the part that by buying shares you become an owner of the company. You seem to treat shares as you would a GIC.





mordko said:


> How do you run out of money? Easy. Dividends are not guaranteed. Company profits plunge and you are screwed.


Agreed, but as I've been retired 10yrs, Agent99 14 yrs and possibly others, and the companies seem to be hanging in there. The odds are better that I may drop tomorrow, get hit by lightning, etc, before the dividends get cut\dropped enough that we can't continue to live off them.


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## Nelley (Aug 14, 2016)

mordko said:


> ^that's not quite what Graham says. The Intelligent Investor has a whole chapter on dividends. Graham quotes a bunch of examples and cites the opposing views. His own view comes at the end of the chapter:
> 
> Management should either:
> 
> ...


Using Graham's own logic, management should lower or defer their own wages and reinvest that capital to produce an adequate increase in per share earnings-why isn't that happening? Oh yeah-they want to get paid and they aren't 100% sure their "reinvestment" plan is gonna work.


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## mordko (Jan 23, 2016)

There is always a risk. You can reduce this risk by diversifying between different industries within Canada and internationally.


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## mordko (Jan 23, 2016)

Nelley said:


> Using Graham's own logic, management should lower or defer their own wages and reinvest that capital to produce an adequate increase in per share earnings-why isn't that happening? Oh yeah-they want to get paid and they aren't 100% sure their "reinvestment" plan is gonna work.


No.


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## Nelley (Aug 14, 2016)

mordko said:


> No.


That is right-a big fat NO- and that is exactly what dividend investors say.


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## mordko (Jan 23, 2016)

Glad you are happy with your parody on logic. The lack of understanding of basic fundamentals is staggering. 

Salary and dividends are not the same thing. Because management don't own tall of the company, they would actually be better off by pocketing the whole profit, except it's called stealing. By renouncing their salary so that company can invest, they would be doing the reverse - giving away their money to company owners. This is moving money from one person to another.

There is no parallel with dividend policy where the issue is what gives the owner better value in the future. You are moving money from one pocket to another but it's still your pocket.

This ought to be obvious.


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## Nelley (Aug 14, 2016)

mordko said:


> Glad you are happy with your parody on logic. The lack of understanding of basic fundamentals is staggering.
> 
> Salary and dividends are not the same thing. Because management don't own tall of the company, they would actually be better off by pocketing the whole profit, except it's called stealing. By renouncing their salary so that company can invest, they would be doing the reverse - giving away their money to company owners. This is moving money from one person to another.
> 
> ...


You miss the point-when you receive a cash dividend YOU are in control of what you want to do with that cash-not management-this is why posters are explaining a bird in the hand is worth two in the bush-when you compare a cash dividend to a capital gain you are comparing apples to oranges.


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## mordko (Jan 23, 2016)

And by that logic nobody should ever invest at all. Just keep your bird.


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## Nelley (Aug 14, 2016)

mordko said:


> And by that logic nobody should ever invest at all. Just keep your bird.


That is right-Mordko should never invest at all.


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## TomB19 (Sep 24, 2015)

The argument against dividend paying stocks completely ignores opportunity cost.

I've modelled quite a few scenarios and it is clear that a situation with two stocks with the same total gain, but one distributes heavily while the other does not, are not worth the same. The stock which distributes will allow a value investor to take advantage of pricing opportunities while the stock which does not distribute will compound itself more efficiently without being managed. The result will vary with frequency and amplitude of market volatility.


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## doctrine (Sep 30, 2011)

mordko said:


> ^that's not quite what Graham says. The Intelligent Investor has a whole chapter on dividends. Graham quotes a bunch of examples and cites the opposing views. His own view comes at the end of the chapter:
> 
> Management should either:
> 
> ...


The challenge is finding #2 at anything resembling a reasonable valuation. Companies that successfully reinvest earnings at a greater return in the market over a period of time are in almost all cases awarded extremely high valuations. That is why Graham stocks almost always pay dividends. Facebook, Amazon and Google (amongst many others) have fantastic returns on invested equity but you will be waiting many years to find them at valuations resembling anything resembling Graham criteria, i.e P/Es under 15 and P/B under 1.5.


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## AltaRed (Jun 8, 2009)

Nelley said:


> You miss the point-when you receive a cash dividend YOU are in control of what you want to do with that cash-not management-this is why posters are explaining a bird in the hand is worth two in the bush-when you compare a cash dividend to a capital gain you are comparing apples to oranges.


A bird in hand is ofen worth two in the bush, but dividends are inexplicably interwined with cap gains. What is paid out in dividends is not available for re-investment to grow the business to cause asset growth which in turn causes share appreciation and capital gains, and yes, dividend growth. Granted many CEOs can blow their cash flow on idiotic growth schemes, but that comes to roost eventually with faltering/straight lined cash flow generation/dividend growth. Many also re-invest their money into ventures that defy the retail investor's ability to do likewise. Companies that have high single or low double digit ROE are doing a much better job of growing wealth than we do with single digit returns on our portfolios. 

What seems to have gotten out of hand here are dug-in positions on either or. I criticize Canew because it is terrible advice only to look at dividends and dividend growth stream, without looking at company fundamentals including its ROE, earnings and cash flow growth. IOW, company valuations. Otherwise good companies do flame out. So it does matter what is happening in the underlying business, and it does matter what Total Return is... to preserve that precious dividend stream into the future. While some posters might have gotten themselves into the position of being able to put blinders on and only look at their dividend stream, they didn't really get there by not looking at company (and thus overall stock) performance in the first place.


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## Nelley (Aug 14, 2016)

doctrine said:


> The challenge is finding #2 at anything resembling a reasonable valuation. Companies that successfully reinvest earnings at a greater return in the market over a period of time are in almost all cases awarded extremely high valuations. That is why Graham stocks almost always pay dividends. Facebook, Amazon and Google (amongst many others) have fantastic returns on invested equity but you will be waiting many years to find them at valuations resembling anything resembling Graham criteria, i.e P/Es under 15 and P/B under 1.5.


To be redundant-exactly how do you know for sure IN ADVANCE which companies are going to wisely and prudently invest that dividend you gave up in return for increased capital gain? Of course we all want capital gains but like I said a cash dividend and a capital gain are two different things that cannot simply be lumped together for "total return".


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## TomB19 (Sep 24, 2015)

Nelley said:


> To be redundant-exactly how do you know for sure IN ADVANCE which companies are going to wisely and prudently invest that dividend you gave up in return for increased capital gain?


Companies that can use expansion to provide economies of scale and companies that have proven to be good investors.

A significant portion of companies just want to get bigger. In these cases, I'd rather have the distribution.


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## mordko (Jan 23, 2016)

doctrine said:


> The challenge is finding #2 at anything resembling a reasonable valuation. Companies that successfully reinvest earnings at a greater return in the market over a period of time are in almost all cases awarded extremely high valuations. That is why Graham stocks almost always pay dividends. Facebook, Amazon and Google (amongst many others) have fantastic returns on invested equity but you will be waiting many years to find them at valuations resembling anything resembling Graham criteria, i.e P/Es under 15 and P/B under 1.5.


As I interpret those who argue for "dividend stocks" in this thread, they are not talking about pure growth and zero div vs non-zero div. They are using high dividends as the number one criterion to screen for stocks. I am assuming they would screen out something paying 2 percent, whatever valuation and future profit estimates, and screen in a stock which pays 6 percent. As such, they are focusing on a very small subset of correlated industries, which are overvalued right now.


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## Nelley (Aug 14, 2016)

mordko said:


> As I interpret those who argue for "dividend stocks" in this thread, they are not talking about pure growth and zero div vs non-zero div. They are using high dividends as the number one criterion to screen for stocks. I am assuming they would screen out something paying 2 percent, whatever valuation and future profit estimates, and screen in a stock which pays 6 percent. As such, they are focusing on a very small subset of correlated industries, which are overvalued right now.


No-most dividend investors are looking for a high dividend along with dividend growth. They are looking for 1. high dividend 2. dividend growth 3. capital gain. Obviously the goal is to get all three, in that priority order.


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## MrMatt (Dec 21, 2011)

TomB19 said:


> The argument against dividend paying stocks completely ignores opportunity cost.


Actually it matters if the opportunity cost is higher or lower than the return of the stock that is retaining those earnings.
Assuming they are equal, it doesn't matter.

If the company can generate a return higher than your opportunity cost, reinvestment makes sense.
If the company can't generate returns equivalent to your cost, you shouldn't own the company anyway.

The dividend non-dividend argument is dumb. You have to assume different returns, or some other factor for there to be real difference (taxes are the biggie)


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## mordko (Jan 23, 2016)

Nelley said:


> To be redundant-exactly how do you know for sure IN ADVANCE which companies are going to wisely and prudently invest that dividend you gave up in return for increased capital gain? Of course we all want capital gains but like I said a cash dividend and a capital gain are two different things that cannot simply be lumped together for "total return".


In advance you KNOW nothing. If you are picking stocks, you should put a lot of effort in analysis of future prospects and company management. Looking at dividends isn't it.


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## mordko (Jan 23, 2016)

Nelley said:


> No-most dividend investors are looking for a high dividend along with dividend growth. They are looking for 1. high dividend 2. dividend growth 3. capital gain. Obviously the goal is to get all three, in that priority order.


How do you define high dividend? 5 or 6 percent? Do you discount anything less?


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## Nelley (Aug 14, 2016)

mordko said:


> How do you define high dividend? 5 or 6 percent? Do you discount anything less?


I would say at least 3.3%-everybody has their own idea.


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## AltaRed (Jun 8, 2009)

Nelley said:


> I would say at least 3.3%-everybody has their own idea.


Seems a shame to discount the likes of consumer and many industrial stocks with dividend yields in the 1-3% range. CAnada is already short of fine stocks such as these. Why would someone not consider a CN or a CCL or a Saputo or?


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## mordko (Jan 23, 2016)

And what does that leave other than banks and utilities/infrastructure plus REITs?


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## Nelley (Aug 14, 2016)

mordko said:


> And what does that leave other than banks and utilities/infrastructure plus REITs?


If you want the entire market index funds are available.


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## mordko (Jan 23, 2016)

Can I make a suggestion? Back test your portfolio for performance between 1967 and 1982. 15 years, fairly typical outlook for someone already retired.


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## Nelley (Aug 14, 2016)

mordko said:


> Can I make a suggestion? Back test your portfolio for performance between 1967 and 1982. 15 years, fairly typical outlook for someone already retired.


It is 2016-not 1967. In 49 years it will be 2065, not 2016.


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## Argonaut (Dec 7, 2010)

Those making the argument against dividends tend to say that a company reinvesting that money into itself could/should make a higher return. But even if they do reinvest and have a better ROI there's no guarantee that will translate into the stock price at all. Dividends are something that can be relied on and quantified. Fluctuations in the market cannot. Dividends are the holy grail of the stock market.


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## Nelley (Aug 14, 2016)

mordko said:


> Can I make a suggestion? Back test your portfolio for performance between 1967 and 1982. 15 years, fairly typical outlook for someone already retired.


Hate to tell you this, but if we get that 1967-1982 interest rate situation Ontario will look somewhat like Argentina.


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## TomB19 (Sep 24, 2015)

MrMatt said:


> Actually it matters if the opportunity cost is higher or lower than the return of the stock that is retaining those earnings.
> Assuming they are equal, it doesn't matter.


Actually, you almost have it. Where you went wrong is assuming all stocks have the same value.

If every stock in your portfolio distributed 5% annually, would you buy that much more of every stock in your portfolio? I wouldn't. I'd put the money into two or three stocks that are the most attractive to me, based on a number of factors including: total return, distributions, perceived value, portfolio diversity, etc.

My CNR distributions, what few there are, do not go toward buying more CNR and they probably never will.

This is why it's important to me to have, at least, some investments that distribute well. It lets me shop for good deals on a more frequent basis.


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## mordko (Jan 23, 2016)

Nelley said:


> Hate to tell you this, but if we get that 1967-1982 interest rate situation Ontario will look somewhat like Argentina.


The point is that long term interests have been falling. The industries you put all your money in are sensitive to rates. They have been performing well, but interest rates can't fall too much further. You are taking a bet.


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## gibor365 (Apr 1, 2011)

> Hate to tell you this, but if we get that 1967-1982 interest rate situation Ontario will look somewhat like Argentina.


You're going to far 

*Almost a million Canadians couldn't handle a 1-point interest rate rise, TransUnion says*
http://www.cbc.ca/news/business/transunion-debt-interest-rates-1.3759844


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## AltaRed (Jun 8, 2009)

Not as bad for companies I think but most have loaded up on a lot of debt since it is way cheaper than equity...and an inexpensive way to fund dividends on a temporary basis.


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## agent99 (Sep 11, 2013)

Normal Rothery wrote this interesting article on dividend investing a few years back:

http://www.moneysense.ca/save/investing/dividends-the-stocks-that-pay-you-back/

He links to this chart which is quite impressive!

http://www.moneysense.ca/wp-content/uploads/2010/06/NORTHERN-DIV..jpg

I have used this sort of approach. Pick my own stocks. Many available in Canada among Banks, Telecoms, utilities, reits, industrials, agriculture, pipelines. On top of that I buy split preferreds, convertible debentures and corporate bonds. No etfs and just one minimal MF. Overall portfolio distribution yield is about 5.25% which along with CPP/OAS allows for comfortable living expenses. Portfolio growth has so far more than covered inflation. If things continue to work out as they have for 14 years (50% growth), our kids will be happy.

Not sure why this thread even exists. We all know that companies have the choice to keep and re-invest their income or if they want to attract a different type of investor, they can pay part of income as dividends and reinvest the rest in the company. Those of us who need a regular cash flow, chose dividend payers. So what is there to get so antsy about?

One other thing I use as a guide to adding to bank stocks (only based on my observations and gut feel!) 
- Canadian banks are overvalued when their yield drops below 4%. 
- They compete with each other to keep their dividend yield approx the same.


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## gibor365 (Apr 1, 2011)

> One other thing I use as a guide to adding to bank stocks (only based on my observations and gut feel!)
> - Canadian banks are overvalued when their yield drops below 4%.
> - They compete with each other to keep their dividend yield approx the same.


I'd add: 
- if one of the big banks underperfoms for couples of Q, it will outperform later ... for medium-long term all big banks perform similary
- if yield more than 5%, banks are undervalued


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## mordko (Jan 23, 2016)

Interesting plot from Rotary. Peculiar, how the relative performance of high yield stocks took off around 1982.

Here is another interesting long term trend. http://finance.yahoo.com/blogs/talking-numbers/222-years-interest-history-one-chart-173358843.html

Could there be a correlation?

Judging about overvalued stocks based on yield can easily result in discounting the best value stock among banks.


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## Pluto (Sep 12, 2013)

mordko said:


> Interesting plot from Rotary. Peculiar, how the relative performance of high yield stocks took off around 1982.
> 
> Here is another interesting long term trend. http://finance.yahoo.com/blogs/talking-numbers/222-years-interest-history-one-chart-173358843.html
> 
> Could there be a correlation?


Yes. High interest rates are good for stocks, Low interest rates are bad for stocks.


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## Eder (Feb 16, 2011)

The best value in bank stocks is opinion not fact. Imo the best value atm is Canadian Western Bank, but others will dispute my opinion...pick your favorite horse and run with it will be fine.


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## mordko (Jan 23, 2016)

Pluto said:


> Yes. High interest rates are good for stocks, Low interest rates are bad for stocks.


No. Very low interest rates/deflation are bad for stocks.


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## mordko (Jan 23, 2016)

But the point was rather simple. 

Utilities/infrastructure and REITs do comparatively well when interest rates are low. Canadian mortgages could start failing if interest rates go up. Bingo - all Canadian "high dividend stocks" are in trouble.


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## Eder (Feb 16, 2011)

You should have stated " All Canadian stocks" would be in trouble


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## mordko (Jan 23, 2016)

Not at all. If you are picking exclusively correlated rate sensitive industries which love low rates, reinforcing it by concentrating on companies that borrow to pay dividends, don't be surprised if your portfolio underperforms when rates go up. As they will, sooner or later.


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## Nelley (Aug 14, 2016)

mordko said:


> Not at all. If you are picking exclusively correlated rate sensitive industries which love low rates, reinforcing it by concentrating on companies that borrow to pay dividends, don't be surprised if your portfolio underperforms when rates go up. As they will, sooner or later.


And then almost everything goes bankrupt-they can't even keep things pasted together at these interest rates.


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## AltaRed (Jun 8, 2009)

You may all get your wish. LIBOR is creating up this year, albeit off a gutter level bottom. Has to be reflected in bond yields sometime.


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## agent99 (Sep 11, 2013)

AltaRed said:


> You may all get your wish. LIBOR is creating up this year, albeit off a gutter level bottom. Has to be reflected in bond yields sometime.


Sorry what does 'creating up' mean?


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## agent99 (Sep 11, 2013)

gibor365 said:


> I'd add:
> - if one of the big banks underperfoms for couples of Q, it will outperform later ... for medium-long term all big banks perform similary
> - if yield more than 5%, banks are undervalued


Yes - that too 

I checked that out - these are the Total Returns of the big banks between Aug 1996 and Jan 2016

TD 15.9%; RY 16.63%; BNS 15.6%; BMO 12.92%; CM 12.02%; NA 15.92%

So a couple of laggards - maybe they picked up a little later! But otherwise supports your thinking 

Regardless, pretty impressive returns for those who bought and held the banks. No wonder we love them


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## AltaRed (Jun 8, 2009)

agent99 said:


> Sorry what does 'creating up' mean?


Creeping up.... sorry. Not sure why that happened.


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## Pluto (Sep 12, 2013)

mordko said:


> No. Very low interest rates/deflation are bad for stocks.


Nope. don't require deflation. Just low rates are bad for stocks.


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## james4beach (Nov 15, 2012)

mordko said:


> As I interpret those who argue for "dividend stocks" . . . They are using high dividends as the number one criterion to screen for stocks. I am assuming they would screen out something paying 2 percent


What I don't get is, why is the TSX Composite not good enough for dividend investors? XIC has a *2.9% dividend yield* and 3.6% trailing 12 month yield. I've said before that I think XIC (or ZCN) is the best dividend ETF.

You want "growing dividends"? The index does that too. XIC was distributing around $0.12 quarterly in 2010, and now is distributing $0.17 ... that's a dividend increase of 42% in just a few years.

Instead of scrambling to hunt down dividend stocks of their own, ending up with exaggerated sector weightings or unsustainably high payouts (income/energy trusts for example) or complex exotic instruments like preferred shares - or occasional company collapses - why not just go with the benchmark ETF ?

Is the 3% dividend yield of XIC/XIU _really_ not enough? We're talking here about an index ETF that has returned 6.9% since inception in 1999.


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## Nelley (Aug 14, 2016)

james4beach said:


> What I don't get is, why is the TSX Composite not good enough for dividend investors? XIC has a *2.9% dividend yield* and 3.6% trailing 12 month yield. I've said before that I think XIC (or ZCN) is the best dividend ETF.
> 
> You want "growing dividends"? The index does that too. XIC was distributing around $0.12 quarterly in 2010, and now is distributing $0.17 ... that's a dividend increase of 42% in just a few years.
> 
> ...


It hasn't done very well over the last few years-yeah it has done great since Jan 2016 but overall it is where is was 2.5 years ago-not exactly impressive IMO.


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## james4beach (Nov 15, 2012)

Nelley said:


> It hasn't done very well over the last few years-yeah it has done great since Jan 2016 but overall it is where is was 2.5 years ago-not exactly impressive IMO.


Here are charts that show return, including dividends, for exactly the last 2.5 years as you say. The % return figure is the cumulative total over the 2.5 years

XIC: +9.0% , http://stockcharts.com/h-sc/ui?s=XIC.TO&p=D&yr=2&mn=6&dy=0&id=p38971342642
ZDV: +2.2%, http://stockcharts.com/h-sc/ui?s=ZDV.TO&p=D&yr=2&mn=6&dy=0&id=p92356136343
XDV: +1.9%, http://stockcharts.com/h-sc/ui?s=XDV.TO&p=D&yr=2&mn=6&dy=0&id=p00616542773

I don't understand your criticism. XIC has performed better than some popular "dividend portfolios". XDV is the most popular dividend ETF in Canada.


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## Nelley (Aug 14, 2016)

james4beach said:


> Here are charts that show return, including dividends, for exactly the last 2.5 years as you say. The % return figure is the cumulative total over the 2.5 years
> 
> XIC: +9.0% , http://stockcharts.com/h-sc/ui?s=XIC.TO&p=D&yr=2&mn=6&dy=0&id=p38971342642
> ZDV: +2.2%, http://stockcharts.com/h-sc/ui?s=ZDV.TO&p=D&yr=2&mn=6&dy=0&id=p92356136343
> ...


They all look bad-why would anyone want that XDV? Under the table money for pension funds to buy it?


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## mordko (Jan 23, 2016)

... And less risk.


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## agent99 (Sep 11, 2013)

james4beach said:


> We're talking here about an index ETF that has returned 6.9% since inception in 1999.


James, I agree that you don't get it yet. 

Suppose you have saved $1Million when you retire. Being single, you collect CPP, say $13k pa. No other pension. Lets say you also have OAS, so add $6800. So before investment income, you have almost $20k to live on. But, you have your million invested in XIC at a whopping 2.9%. So now you have another $29k for a total of $49k. Good thing is, your taxes will be low - say $2500, so you are left with $46,500 to spend. If you need more, you can sell off some of that XIC. Perhaps at the least opportune time?

If you really had $1million (2016$) and that is enough to live on, go for it! But on average very few retirees have saved that much and have to live off an even more meager income.

If frugality suits your lifestyle, that's fine. But for many, they need to do a little better to actually enjoy retirement.

Perhaps you are young and not thinking yet about retirement and are happy with those low dividend payments as a supplement to a salary or other income. If so, you should realize that postings on this forum reach a wider audience. Hopefully that audience is smart enough to filter out the never ending noise.


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## AltaRed (Jun 8, 2009)

Seems like those ETFs have had good dividend growth, as good as many individual diividend stocks. Using the XIC numbers above, a change from 0.12 in 2010 to 0.17 in 2016 seems to be a good compound rate, no?


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## james4beach (Nov 15, 2012)

Nelley said:


> *They all look bad-why would anyone want that XDV*? Under the table money for pension funds to buy it?


This whole thread is about how dividend investing is great. Here are the most popular dividend strategy ETFs in Canada along with the 2.5 yr cumulative return. There's over $4 billion invested in these:

XDV with $1383 million, +1.9%
CPD with $1202 million, -11.6%
CDZ with $939 million, +11.3%
ZDV with $651 million, +2.2%

As these as professionally run portfolios pursuing advanced dividend stock picking strategies, retail investors doing their own "dividend investing" will probably do no better than these.

Of the above, only CDZ did better than TSX benchmark (XIC). Are individual dividend investors, picking their own stocks, really doing better than this?


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## mordko (Jan 23, 2016)

Agent, me thinks James gets it. What you are trying to say is sad, but really not that complicated. It is almost inevitable that it will end up in tears.


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## james4beach (Nov 15, 2012)

agent99 said:


> Suppose you have saved $1Million when you retire. Being single, you collect CPP, say $13k pa. No other pension. Lets say you also have OAS, so add $6800. So before investment income, you have almost $20k to live on. But, you have your million invested in XIC at a whopping 2.9%. So now you have another $29k for a total of $49k. Good thing is, your taxes will be low - say $2500, so you are left with $46,500 to spend. If you need more, you can sell off some of that XIC. Perhaps at the least opportune time?


You're saying the XIC dividends are not enough for a retiree to live on, correct?

Then sell off shares as you need them. This is equivalent to dividends. Every dividend you get represents cash directly coming out of equity value. Whether it's a dividend being paid out, or some shares you liquidate, it has the exact same effect: both remove value from equity and eat into capital.

Dividends are not free cash. They come directly out of equity. I know this is not how people think about it, but it's the reality of dividends... there is no free lunch. Whether you use dividends or selling off shares, it's the same end result.


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## james4beach (Nov 15, 2012)

And since they are equivalent, my argument is to seek the best total return and most reliable methodology (i.e. XIC).


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## agent99 (Sep 11, 2013)

mordko said:


> It is almost inevitable that it will end up in tears.


 That is true - that was what I was trying to point out to James.



> Then sell off shares as you need them. This is equivalent to dividends.


 James, I covered that in my post. If markets retract as many here are predicting, you may have to sell at the most inopportune time. So, no, they are not equivalent.

But really, this discussion has run it's course and is spinning in circles . Same old things that we all know are being repeated over and over. Let's move on.


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## james4beach (Nov 15, 2012)

Right, this is in circles now. We're talked about this before. There are some core things we disagree on... my understanding is that when the dividend pays you out at a depressed stock point, it is also removing value from equity at the worst possible time. So I see no difference between dividends and selling shares.


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## mordko (Jan 23, 2016)

The sad part is that they are thinking about it in terms of bonds and assuming it reduces risk while in reality they are taking on excessive risks.


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## Nelley (Aug 14, 2016)

james4beach said:


> This whole thread is about how dividend investing is great. Here are the most popular dividend strategy ETFs in Canada along with the 2.5 yr cumulative return. There's over $4 billion invested in these:
> 
> XDV with $1383 million, +1.9%
> CPD with $1202 million, -11.6%
> ...


Huh? This isn't rocket science-pull up the stock charts and dividend yields for lots of well known Canadian equities-so yeah lots of people are doing better than your "advanced physics" approach.


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## mordko (Jan 23, 2016)

Is that so? Lots? Charts and yields? 

In other news: lots of people can predict the future by looking at stars.


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## Nelley (Aug 14, 2016)

mordko said:


> Is that so? Lots? Charts and yields?
> 
> In other news: lots of people can predict the future by looking at stars.


1.9% cumulative return over 2.5 years in a strong bull market-very impressive-I would hate to see what your advanced strategy does in a bear market.


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## mordko (Jan 23, 2016)

^Heh  A few points on that:

1. It's not over 2.5 years. It's year to date, money-weighted. 
2. The reason for that is that just over 50% of my investment funds are in UK funds and sterling dropped over 15% because of Brexit. 
3. Thanks for your concern over bear market performance of my strategy. Since mid 90s it has helped me to secure net worth of about 2M CAD, which isn't superrich but not all that bad for an immigrant who started from scratch. That's not counting DB pension although still a few years to go to get the full value.


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## AltaRed (Jun 8, 2009)

james4beach said:


> As these as professionally run portfolios pursuing advanced dividend stock picking strategies, retail investors doing their own "dividend investing" will probably do no better than these.


Careful. ETFs are not professionally run portfolios. They are passive investors of a professionally designed algorithm. Stock selection is mandated by the algorithm... not picked.

Stock pickers do not invest on broad indices. They invest based on, hopefully, some sliced and diced methodology. There are slice and dice boutique ETFs for that too.... like XFN for financials, etc, etc, etc. The arguments in these pages of posts are not comparing apples with oranges, nor do they have 3, 5, 10 yr rolling average historys. Cherry picking data of the past year, or 2.5 years or since 2010, is not terribly relevant.

The truth of the matter though is the math still says that all investors combined cannot beat the market (less fees) because they are the market. So for all the winner stock pickers here, there certainly has to be a bunch of losers somewhere. A sobering thought, isn't it?


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## james4beach (Nov 15, 2012)

True AltaRed, but something like ZDV is certainly an algorithmically driven methodology. They have a whitepaper on it here (and it seems like a pretty reasonable strategy).


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## james4beach (Nov 15, 2012)

mordko & Nelley - you're talking about two different things. Nelley I believe is referring to the poor performance of XDV in the 2.5 year time period

mordko, I'd love to hear more about your strategy (possibly better suited for a different thread). Heck, I'll kick off a high level strategies thread to discuss
http://canadianmoneyforum.com/showthread.php/100218-What-is-your-investment-strategy-at-a-high-level


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## mordko (Jan 23, 2016)

james4beach said:


> mordko & Nelley - you're talking about two different things. Nelley I believe is referring to the poor performance of XDV in the 2.5 year time period


In that case his comment makes no sense. XDV is NOT "my" strategy in any way shape or form. My strategy is a boring couch potato, except that a large chunk is stuck in British mutual funds. To be fair, their fees are less than half MFs charge in Canada, so it's not quite so bad. 

Another difference from CP - I tend to revise regional weightings every 5 years using the "contrarian" approach. Since last year I have been heavy in EMs. Also, right now a small amount is in prescious metals. Just an insurance at the time when governments are trying to devalue their currencies. 

Nothing special, but it has delivered about 8 pc per year and that period includes a couple of major crashes. I believe that's typical long term return for CP/ permanent portfolio styles, works for periods going back further than my mid 90s...

Wonder what is actual long term XIRR for people picking shares based on high dividends, and if any of them go back a couple of decades with the strategy.


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## agent99 (Sep 11, 2013)

james4beach said:


> Right, this is in circles now. We're talked about this before. There are some core things we disagree on... my understanding is that when the dividend pays you out at a depressed stock point, it is also removing value from equity at the worst possible time. So I see no difference between dividends and selling shares.


James, the difference is that once you sell your shares at a low price, you can't recover that loss. If a company maintains their dividend through an overall market downturn, as most do, their payout ratio goes up and share prices may be further impacted/ But once markets recover, shareholders still have their shares and have received the dividends.

Just out of interest, I had a look at Total Return of XIC vs the big banks over past 15 years. (I don't think any of the banks cut their dividends, did they)

XIC came out at 7.34% which admittedly is not bad.

However, a part of that good performance was due to the banks. Wouldn't have been quite as good without them. They make up 22% of XIC

RY 12.8%, TD 11%; CM 9.3%; NA 12.6%; BNS 12.4%; BMO 9.26% (% is TR)

Weightings are not equal but lets guess at 11.5% average for banks. That means remainder would have had TR of 6.2% - Still not that bad. 

Another study would be to compare one investor who cherry picked the higher dividend payers out of XIC with div yield of say 5% pa with another who bought XIC with div yield of say 3% and had to sell off some of holdings each year to obtain same 5%. I suspect the second one would have not done very well through the 2008/9 downturn. But I have not done the study!

I have nothing against XIC. Have owned it myself at times when I was expecting/hoping for a TSX bull market. I also advised my kids to buy it as the equity part of their savings when they had limited resources. It's a good place to start.


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## Pluto (Sep 12, 2013)

james4beach said:


> What I don't get is, why is the TSX Composite not good enough for dividend investors? XIC has a *2.9% dividend yield* and 3.6% trailing 12 month yield. I've said before that I think XIC (or ZCN) is the best dividend ETF.
> 
> You want "growing dividends"? The index does that too. XIC was distributing around $0.12 quarterly in 2010, and now is distributing $0.17 ... that's a dividend increase of 42% in just a few years.
> 
> ...


I can't speak for all dividend investors. I don't want an index etf because they include cyclical companies. I don't want to hold cyclicals during their downturns. Why would I want to hold TECK while it goes from 30 down to 5? Why would I want xyz oil company while it goes from 40 to 12? 

I want to hold non-cyclicals and trade cyclicals. 

In addition, from time to time a stock I like hits an air pocket thereby presenting better value. I want to buy it without having to buy a piece of everything. 
I like some banks, but not LB. So why would I buy an etf where I am forced to own a piece of LB? 

Dividend payers is an essential criterion for selection, but it isn't primary. Debt/equity has to be good. ROE is also important. With an etf, I am forced to buy the crap too. I want companies whose total return has consistently outperformed the index.


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## Nelley (Aug 14, 2016)

Pluto said:


> I can't speak for all dividend investors. I don't want an index etf because they include cyclical companies. I don't want to hold cyclicals during their downturns. Why would I want to hold TECK while it goes from 30 down to 5? Why would I want xyz oil company while it goes from 40 to 12?
> 
> I want to hold non-cyclicals and trade cyclicals.
> 
> ...


I guess the advertising and appeals to authority sell these ETFs-it doesn't appear that logic does.


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## Pluto (Sep 12, 2013)

mordko said:


> Wonder what is actual long term XIRR for people picking shares based on high dividends, and if any of them go back a couple of decades with the strategy.


You are assuming people pick based on high dividends. debt/equity is a criterion. ROE also. Traditionally good management etc. I don't know anyone who just buys a stock purely because of its dividend.


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## mordko (Jan 23, 2016)

Ok not purely, but they have to screen out a lot of stocks to get 6 percent distributions on the whole portfolio. In the current environment it means that most Canadian stocks out of bounds. 

Has anyone actually stuck with this strategy for a couple of decades or so?


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## Pluto (Sep 12, 2013)

james4beach said:


> Then sell off shares as you need them. This is equivalent to dividends.


since it is equivalent to dividends, why are you against dividend paying stocks?


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## mordko (Jan 23, 2016)

Nobody is "against dividend paying stocks".


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## Pluto (Sep 12, 2013)

mordko said:


> Ok not purely, but they have to screen out a lot of stocks to get 6 percent distributions on the whole portfolio. In the current environment it means that most Canadian stocks out of bounds.
> 
> Has anyone actually stuck with this strategy for a couple of decades or so?


You can't just, out of the blue, at any old time, demand 6% yield. You have to plan ahead. With the quality companies dividends increase. Example FTS. 1998 div was 0.45, presently 1.40. So the yield on the original 1998 cost is about 13%. TD: 1999 div = 0.36 per share. 2015 div = 2.00 per share, so yield on original cost is over 10%. Lots of examples are available. 

Yes some people have stuck with this for a long time. I think some of them are posting their strategy but not too many are paying attention.


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## Pluto (Sep 12, 2013)

mordko said:


> Nobody is "against dividend paying stocks".


Nice try. James is continually criticizing dividend paying stocks.


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## cheech10 (Dec 31, 2010)

IMO, mordko and james are right: total return is all that matters. If you need more income, sell some shares. In fact, a dividend paid is essentially the same as a stock sale: the price of the security *should* drop by a commensurate amount when a dividend is paid to reflect the loss in value of the security when cash is paid out, but this is often obscured by other price movements on the same day. That doesn't mean avoid dividend paying stocks; many of the best companies pay dividends and it makes no sense to avoid them, but a strategy that picks stocks because of the dividend is likely to do worse than one focused on total return.

In fact, from a taxation point of view, non-dividend payers should be preferred: capital gains defer the taxable event until the sale of the security, and are taxed more favourably. The deferral is particularly important during the accumulation phase, but I argue the tax rate still makes cap gains preferable to dividends in retirement.


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## AltaRed (Jun 8, 2009)

Pluto said:


> Nice try. James is continually criticizing dividend paying stocks.


I think James is simply against the obsession with blindly looking at high yield dividend stocks to the exclusion of broad based investment criteria, e.g. Graham tupe fundamentals. All my Canadian holdings pay dividends as a matter of principle (and I want dividend income in my retirement cash flow) but I don't screen on the basis of dividends yield. Too many companies (blue chip ones) reach with dividend yield just to shore up their share price so that they can go back to the market with secondary offerings to rinse and repeat the cycle or take on more debt. That kind of behaviour is not sustainable long term.


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## james4beach (Nov 15, 2012)

Pluto said:


> since it is equivalent to dividends, why are you against dividend paying stocks?


I'm not opposed to dividend paying stocks. I keep recommending XIC as one of the best ways to invest in Canada; TSX Composite has a good amount of dividends.

What I'm opposed to is a dividend yield-chasing methodology that clouds an investor's judgement to the point where they construct weird or dangerous portfolios (like heavy on energy trusts or bank shares). Sometimes when overly focused on yield, investors harm themselves. The income trust fad was exactly this, then energy trusts, followed by a hype in preferred shares.

Here's what I'm OK with -- if you are dividend focused, but can construct a portfolio that has a pretty good balance between sectors, and contains many well established large caps. However by this point I suspect you will end up with basically XIC, which you could have bought for 0.06% MER


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## Market Lost (Jul 27, 2016)

mordko said:


> The sad part is that they are thinking about it in terms of bonds and assuming it reduces risk while in reality they are taking on excessive risks.


Just curious as to what you mean as "excessive"? What is it excessive to? Right now the S&P is being driven higher by a small number of stock, some of which are mo-mo stocks such as Amazon. As for the TSX, this index has been a dog for the past two years. Do you think that these stocks are less risky than good dividend paying stocks?


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## Market Lost (Jul 27, 2016)

mordko said:


> Ok not purely, but they have to screen out a lot of stocks to get 6 percent distributions on the whole portfolio. In the current environment it means that most Canadian stocks out of bounds.
> 
> Has anyone actually stuck with this strategy for a couple of decades or so?


I'm not sure anyone here is saying they are looking for 6%+, are they? That would be just insane, and would lead to choosing stocks such as POT, AGF, and D.UN. That would be a good way to try and blow up your portfolio.


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## Market Lost (Jul 27, 2016)

cheech10 said:


> IMO, mordko and james are right: total return is all that matters. If you need more income, sell some shares. In fact, a dividend paid is essentially the same as a stock sale: the price of the security *should* drop by a commensurate amount when a dividend is paid to reflect the loss in value of the security when cash is paid out, but this is often obscured by other price movements on the same day. That doesn't mean avoid dividend paying stocks; many of the best companies pay dividends and it makes no sense to avoid them, but a strategy that picks stocks because of the dividend is likely to do worse than one focused on total return.
> 
> In fact, from a taxation point of view, non-dividend payers should be preferred: capital gains defer the taxable event until the sale of the security, and are taxed more favourably. The deferral is particularly important during the accumulation phase, but I argue the tax rate still makes cap gains preferable to dividends in retirement.


I'm guessing you aren't retired, since you assume that the tax consequences are better for capital gains. In the accumulation phase, yes this is true, but if you are to the point that you have to start living off your income, then it's a different story.


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## Argonaut (Dec 7, 2010)

james4beach said:


> Here's what I'm OK with -- if you are dividend focused, but can construct a portfolio that has a pretty good balance between sectors, and contains many well established large caps. However by this point I suspect you will end up with basically XIC, which you could have bought for 0.06% MER


That's not true at all. Not to shamelessly plug, but the 5-pack Portfolio is essentially what you are describing: "balance between sectors, established large caps". It has roughly doubled since inception (March 1, 2011), whereas XIC has returned a pitiful 3% (total, not annual), plus whatever benefits gained from dividends and dollar cost averaging. It's not even close. XIC is not a measure at all in this case to a dividend portfolio.


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## canew90 (Jul 13, 2016)

james4beach said:


> I'm not opposed to dividend paying stocks. I keep recommending XIC as one of the best ways to invest in Canada; TSX Composite has a good amount of dividends.
> 
> What I'm opposed to is a dividend yield-chasing methodology that clouds an investor's judgement to the point where they construct weird or dangerous portfolios (like heavy on energy trusts or bank shares). Sometimes when overly focused on yield, investors harm themselves. The income trust fad was exactly this, then energy trusts, followed by a hype in preferred shares.
> 
> Here's what I'm OK with -- if you are dividend focused, but can construct a portfolio that has a pretty good balance between sectors, and contains many well established large caps. However by this point I suspect you will end up with basically XIC, which you could have bought for 0.06% MER


Of the 242 holdings in XIC there are only 30 I'd ever wish to consider, so yes most of my holdings are listed with xic, but no I would not end up with xic, or at least the 212 stocks I'd never buy and have to pay 0.06% to hold.


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## james4beach (Nov 15, 2012)

Argonaut said:


> That's not true at all. Not to shamelessly plug, but the 5-pack Portfolio is essentially what you are describing: "balance between sectors, established large caps". It has roughly doubled since inception (March 1, 2011), whereas XIC has returned a pitiful 3% (total, not annual), plus whatever benefits gained from dividends and dollar cost averaging. It's not even close. XIC is not a measure at all in this case to a dividend portfolio.


Yes I agree your 5 pack is along those lines and has beaten XIC. You're a success story in this!

Others have not done so well. You for example have stuck to well established majors in their sectors. Others have found more oddball high yielding stocks that didn't work out so well. Look even at ZDV, BMO's fund which followed a very sensible yield picking strategy, that has also under-performed the TSX.

There have been countless threads in this forum with people listing various energy trusts and high yielding stocks they've loaded up on. *Some* ... not all ... investors have harmed themselves with yield chasing.


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## cheech10 (Dec 31, 2010)

Market Lost said:


> I'm guessing you aren't retired, since you assume that the tax consequences are better for capital gains. In the accumulation phase, yes this is true, but if you are to the point that you have to start living off your income, then it's a different story.


You're right, I haven't retired and don't plan to for some time, but between the tax rate being higher for dividends and the effect of the gross-up on OAS, the taxation favors capital gains. No reason why you have to sell the entire security at once; sell only as much as the dividend would be to make an even comparison of the tax burden.


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## james4beach (Nov 15, 2012)

I suspect that part of this resistance to selling shares (including in investment books) is a hold over from the old days in brokerages, where fees to sell were very high. Back then, dividends stood out as a highly cost efficient way to extract cash from investments.


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## mordko (Jan 23, 2016)

james4beach said:


> I suspect that part of this resistance to selling shares (including in investment books) is a hold over from the old days in brokerages, where fees to sell were very high. Back then, dividends stood out as a highly cost efficient way to extract cash from investments.


Nah, they are just treating shares as bonds. Dividends are "free" money while you wouldn't want to sell any shares because you won't get any more interest from your "bond". The thinking is that as long as you are only spending the dividend, you are not touching your actual investment. There is some kind of basic human instinct behind this because it takes hold over people and maths be damned.


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## mordko (Jan 23, 2016)

Argonaut said:


> That's not true at all. Not to shamelessly plug, but the 5-pack Portfolio is essentially what you are describing: "balance between sectors, established large caps". It has roughly doubled since inception (March 1, 2011), whereas XIC has returned a pitiful 3% (total, not annual), plus whatever benefits gained from dividends and dollar cost averaging. It's not even close. XIC is not a measure at all in this case to a dividend portfolio.


Couple of things:

1. XIC = Canada. Canada is a tiny fraction of the world economy, heavily dependent on resources. Limiting investment to Canada is a risky strategy. Right now resource prices are low, in 2011 resource prices were high. 

2. I am not saying one can't pick stocks and beat the market. 5 stocks seems like very few indeed; one of them could really screw everything up, but it could work. Takes a lot of time to pick properly, the time I don't have, but great that it worked out for you. Keep in mind that 2011 - 2016 is not that long and that the period has been characterized by low and falling interests which favours high dividend stock.


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## Eder (Feb 16, 2011)

Thing is forex risks suck. Foreign markets are risky. Its pretty easy to get foreign exposure buying Canadian companies that have a reasonable reporting/disclosure requirement.

The fact is the best TSX businesses pay and increase dividends...they also throw off great capital gains as well. Don't make me provide examples....bragging is for kids.


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## mordko (Jan 23, 2016)

^Be a kid for once. Brag. Please indicate period of time and XIRR.


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## Eder (Feb 16, 2011)

I'm pretty sure most here know what investments have been in my wheel house over the years...over 5 years of posts it looks like lol. Too lazy to do your work for you.


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## mordko (Jan 23, 2016)

Calculating your XIRR is my work for me? Really? 5 years really isn't long enough to test a strategy.


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## Eder (Feb 16, 2011)

Well, I thought I mentioned 5 years of posts...not investing, that would be 35 years.The only trouble is only my historical posts can substantiate my sucess over 5 years...not longer...

As I said anyone on this board longer than a few years already knows my strategy and most likely 80% of my holdings. Now back to the "Deadliest Catch".


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## mordko (Jan 23, 2016)

Are you measuring performance and comparing to benchmarks?


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## canew90 (Jul 13, 2016)

In this thread I've been said to be:
- stuck on a single thought
- in a rut
- chasing yield
- not understanding Total Return

yet when I posted a new thread: http://canadianmoneyforum.com/showthread.php/100202-John-Bogle-amp-Tom-Connolly-Agree
only one person replied.

Seems John Bogle agrees with Tom, and a few of us (Agent 99, Eder, etc) that Market Returns are based more on Income than Price!
John states: "Future Market Returns = Dividend Yield + Earnings Growth +/- Change in P/E Ratio"
Tom says: "In the long run, Return is yield plus dividend growth + or - any valuation factor."


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## Pluto (Sep 12, 2013)

Argonaut said:


> That's not true at all. Not to shamelessly plug, but the 5-pack Portfolio is essentially what you are describing: "balance between sectors, established large caps". It has roughly doubled since inception (March 1, 2011), whereas XIC has returned a pitiful 3% (total, not annual), plus whatever benefits gained from dividends and dollar cost averaging. It's not even close. XIC is not a measure at all in this case to a dividend portfolio.


As far as I am concerned, you are free to shamelessly plug your 5 pack. 
A half a dozen is manageable for an individual investor. Plus it weeds out all the crap that people get when they over diversify, just for the sake of diversification. Safety is in the quality of the company, not in buying a slice of every company under the sun. Not buying all the crap is why you are out performing.


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## Pluto (Sep 12, 2013)

james4beach said:


> Yes I agree your 5 pack is along those lines and has beaten XIC. You're a success story in this!
> 
> Others have not done so well. You for example have stuck to well established majors in their sectors. Others have found more oddball high yielding stocks that didn't work out so well. Look even at ZDV, BMO's fund which followed a very sensible yield picking strategy, that has also under-performed the TSX.
> 
> There have been countless threads in this forum with people listing various energy trusts and high yielding stocks they've loaded up on. *Some* ... not all ... investors have harmed themselves with yield chasing.


Well there you go. One way to be successful is to identify what the successful do, then do it. Identify what the unsuccessful have done, and don't do it.


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## Pluto (Sep 12, 2013)

canew90 said:


> Of the 242 holdings in XIC there are only 30 I'd ever wish to consider, so yes most of my holdings are listed with xic, but no I would not end up with xic, or at least the 212 stocks I'd never buy and have to pay 0.06% to hold.


That is my sentiment as well. Why hold all the crap in a etf? Its a poor way to get diversification, and the results prove it.


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## Pluto (Sep 12, 2013)

canew90 said:


> In this thread I've been said to be:
> - stuck on a single thought
> - in a rut
> - chasing yield
> ...


No one responds because Bogle making evaluations of future returns is not a popular topic. It flies in the face of the mantra that you can't predict/forecast/estimate/evaluate future returns, therefore buy an index etf. I have nothing against an indexing strategy. It suits some people well. But the act of buying an index etf is an implicit prediction/forecast/evaluation of future returns. So my theory is, why not weed out the crap from the etf, and pick from what is left.


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## agent99 (Sep 11, 2013)

Pluto said:


> I have nothing against an indexing strategy. It suits some people well. But the act of buying an index etf is an implicit prediction/forecast/evaluation of future returns. So my theory is, why not weed out the crap from the etf, and pick from what is left.


I agree with that and that is what I try and do. But not everyone has the resources to buy enough individual stocks to provide diversification. So for those in accumulation stage with less to invest, etfs provide for a need. Problem with index etfs, is that they ARE diversified. When you throw all the good in with the bad, then you are diversified and make next to nothing


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## james4beach (Nov 15, 2012)

agent99 said:


> Problem with index etfs, is that they ARE diversified. When you throw all the good in with the bad, then you are diversified and make next to nothing


You make next to nothing in the indexes?

Of course the indexes make good money. Both US and Canadian benchmark index ETFs (let's say SPY and XIU) have had stellar returns since inception in the 1990s. And the Credit Suisse Global Investment Returns Yearbook has showed different country's returns, based on broad indexes, and illustrates that Canada and US have among the best real returns in the world.

Even Buffett says that his estate will be invested 90% in the S&P 500.

There's nothing wrong with index investing. But if you can beat the index, all the power to you!


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## humble_pie (Jun 7, 2009)

Eder said:


> I'm pretty sure most here know what investments have been in my wheel house over the years...over 5 years of posts it looks like lol. Too lazy to do your work for you.



Eder does have a long history here, although alas there are a few newcomers who might not bother to respect it.

Eder is the creator of the world's tiniest beer pack portfolio, the Three-pack. Years ago Eder explained how he had set this up for his young daughter, who was then a student.

unsurprisingly, the Three-pack held three stocks. Roybank, BCE & i believe CN Rail. 

flash forward several years & Eder has mentioned that his daughter - still a young woman - will be a millionnaire before the age of 30.

.


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## humble_pie (Jun 7, 2009)

james4beach said:


> Of course the indexes make good money. Both US and Canadian benchmark index ETFs (let's say SPY and XIU) have had stellar returns since inception in the 1990s.




XIU was only created in 1999. There was a somewhat awkward predecessor but it was unknown among retail investors. Even in 1999, no one had ever heard of ETFs or XIU.


i bought XIU in 2001, paying 45.05 per share, or 11.26 post-split since the ETF would later split 4-1. 

today, after 15 long years, the stock has not even doubled, is worth a mere $21 & change. True, it has always paid out a distribution. Most of the time, a reasonable distribution.

i also eke out XIU's return by selling OTM call options. There's not much premium in these so "eke" is the correct word. I don't sell OTM puts because i definitely do not want any more of this homely, lumpy-dumpy Tante Tricot assigned to me.

i was cheered up, though, when james4 said that the XIU managers were unlikely to be lending out many of XIU's 60 securities, given that there's not much thirst for shorting them. At least XIU might be more of a real fund, less of a representational frankenfund like XIC, i said to myself . each:





> Even Buffett says that his estate will be invested 90% in the S&P 500


i believe Buffett adds that this is because his widow won't be able to walk in his footsteps so he's hoping to make things easier for the little lady. But for himself, while he's alive, does Buffett touch a single ETF? i don't believe so 

.


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## Eder (Feb 16, 2011)

humble_pie said:


> flash forward several years & Eder has mentioned that his daughter - still a young woman - will be a millionnaire before the age of 30.
> 
> .


I promised her by age 50 or I make up the difference... her portfolio is up 62% tr in roughly 3 years and teases me that mine underperforms haha.


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## mordko (Jan 23, 2016)

Buffett:

- Stated that for the vast majority of investors indexing is the right approach
- Invests mostly in private companies, which retail investors cant
- If he invests in public companies, has a stake allowing him to have a major say which retail investors can't
- Does not screen based on high dividends
- Invests in a large number of companies
- His own company does not pay dividends but did OK for investors.


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## gibor365 (Apr 1, 2011)

Pluto said:


> That is my sentiment as well. Why hold all the crap in a etf? Its a poor way to get diversification, and the results prove it.


There is popular dividend ETF - CDZ ... it holds about 80 stocks, include a lot of crap.... for example for years top 3 holdings were stocks with bad fundamentals and payout ratios much above 100% (AGF.B was number 1 )..
Several years ago I created on paper mini-ETF.... took out from CDZ all stocks that had yield < 2%, P/E > 20 and payout > 80%... got about 25 stocks that greatly outperformed CDZ


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## james4beach (Nov 15, 2012)

humble_pie said:


> i bought XIU in 2001, paying 45.05 per share, or 11.26 post-split since the ETF would later split 4-1.
> 
> today, after 15 long years, the stock has not even doubled, is worth a mere $21 & change.


humble_pie, I think you are under-appreciating the total return XIU has provided for you. The share price alone is not the whole picture... you must look at all distributions, which include dividends and also reinvested distributions. It has in fact *tripled* in these 15 years.

The best source of this is to use the charting tool at http://ca.ishares.com/ and you can verify my claims below by looking up XIU in morningstar and looking at their annual performance figures.

When you plug in Sept 17, 2001 to Sept 16, 2016 you'll see that the total return is +199%

From this you can calculate annual return = 2.99^(1/15) -1 = *7.6% per year*

humble, XIU has performed spectacularly well since when you bought it and you have TRIPLED your money! At 7.6% performance you have even out-performed the S&P 500 in that period.

I hate to sound like an XIU sales guy but give credit where credit is due. This has performed spectacularly well.


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## agent99 (Sep 11, 2013)

gibor365 said:


> There is popular dividend ETF - CDZ ... it holds about 80 stocks, include a lot of crap.... for example for years top 3 holdings were stocks with bad fundamentals and payout ratios much above 100% (AGF.B was number 1 )..
> Several years ago I created on paper mini-ETF.... took out from CDZ all stocks that had yield < 2%, P/E > 20 and payout > 80%... got about 25 stocks that greatly outperformed CDZ


Gibor - Good Idea! I used to do that sort of thing using a few of best performing Can Equity Mutual Funds. By getting rid of the chaff and eliminating MERs ended up with core set of stocks to look at and eventually invest in. Easier to look at 25 than the whole TSX!


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## agent99 (Sep 11, 2013)

james4beach said:


> The best source of this is to use the charting tool at http://ca.ishares.com/ and you can verify my claims below


Only takes a minute or two using longrundata:

https://dl.dropboxusercontent.com/u/54783344/xiu performance.JPG

8.67% pa Total Return. $1000 now worth $3480. Not bad.

Seems OK, but bolstered by big banks. RY for example had 12.92% TR over same period. $1000 invested now worth $6196. 

Those index etfs rely heavily on the big banks. XIU has 30% exposure to the 6 big banks.


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## Market Lost (Jul 27, 2016)

james4beach said:


> humble_pie, I think you are under-appreciating the total return XIU has provided for you. The share price alone is not the whole picture... you must look at all distributions, which include dividends and also reinvested distributions. It has in fact *tripled* in these 15 years.
> 
> The best source of this is to use the charting tool at http://ca.ishares.com/ and you can verify my claims below by looking up XIU in morningstar and looking at their annual performance figures.
> 
> ...


Wait! Did you just say dividends?  Can you actually DRIP the XIU?


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## james4beach (Nov 15, 2012)

Of course you can DRIP XIU. The dividends are part of the total return... my whole point is that dividend investors don't really need to look farther than XIU (or XIC). The logrundata source that agent99 pointed to also says that XIU has had a 10% annual dividend growth rate!

Let me be blunt... I am highly skeptical of the claim that stock-picking dividend investors are outperforming the XIU. And even if you are outperforming, how much time and energy is going into that? But this returns us to the old debate of index investing vs stock picking.


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## AltaRed (Jun 8, 2009)

Some retail investors can outperform the index, probably more often than not. Those willing to put in the time and effort, have adopted a strategy that works for them, and have the discipline to stay the course have a higher probablility of doing so. But as has been said before, all investors, including professional and institutional money managers, on average cannot beat the index over a period of time.


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## Market Lost (Jul 27, 2016)

james4beach said:


> Of course you can DRIP XIU. The dividends are part of the total return... my whole point is that dividend investors don't really need to look farther than XIU (or XIC). The logrundata source that agent99 pointed to also says that XIU has had a 10% annual dividend growth rate!
> 
> Let me be blunt... I am highly skeptical of the claim that stock-picking dividend investors are outperforming the XIU. And even if you are outperforming, how much time and energy is going into that? But this returns us to the old debate of index investing vs stock picking.


You can't drip everything, and I only one ETF - ZAG, which I never even looked into. 

I can also be blunt - the XIU sucks, and has done well due to the dividend stocks that most of us prefer. If you use Agent's link, you'll see that in the same time frame, RY has a CAGR of over 12%. In the nine years that I've had a CAGR of over 7%, the XIU has only manged ~3.5%. As for effort, how much effort is it to buy a few good stocks? I think your other thread about slicing and dicing the XIU is a great idea, and I think you'll do much better, and I don't think that it will be any more effort.


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## Market Lost (Jul 27, 2016)

AltaRed said:


> Some retail investors can outperform the index, probably more often than not. Those willing to put in the time and effort, have adopted a strategy that works for them, and have the discipline to stay the course have a higher probablility of doing so. But as has been said before, all investors, including professional and institutional money managers, on average cannot beat the index over a period of time.


I actually think that you'll find that retail investors can actually do better because the larger you are, the more your returns mirror the market, or worse.


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## humble_pie (Jun 7, 2009)

Market Lost said:


> Wait! Did you just say dividends?  Can you actually DRIP the XIU?



one can indeed DRIP the distributions although i have never done this. The only catch is the annual phantom distribution, which is taxable in the investor's hand although investor receives nothing, neither cash nor extra shares.


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## humble_pie (Jun 7, 2009)

lol jas4 by your reckoning my VRX has done a lot better than my XIU.

my VRX is the old biovail, more or less the same vintage, bought when biovail was $11-12-15 CAD. Today as valeant it's trading at CAD $35.82. 

VRX has paid various dividends along the way plus it's always had great big fat juicy lucrative options, which i've been selling regularly like clockwork ever since day one.

my best valeant option was a bear put spread from 2014 to late 2015. I was inspired to the bear by an insight i had in 2014 that valeant was up to no good in the balkans, was in fact possibly smuggling drugs through albania into the middle east.

i set up a bear put spread in 2014. Ten contracts governing 1000 shares. The long side was january 2016 puts at USD $135 each.

for the longest time these puts were worthless, as the stock crested north of $250. But then andrew left happened along in august 2015 with the philidor scandal. It turned out that i was right about the scandal but wrong about the geographic location.

VRX stock plunged to USD 70-80, my puts soared into the $50 range, i sold em in late 2015 for $52 each. That was USD $52,000. I posted a note about all this in the VRX thread, along with a picture of Cara Delavigne as the VRX agent with a mandate to smuggle prescription western meds such as birth control pills into middle eastern countries where they are banned.

no one believed me, but all i can say is that valeant has done very well for me. For performance, profit & pizazz, even a harum-scarum hand-picked stock like VRX can leave poor, dull, plodding tante tricot XIU in the dust.

.


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## humble_pie (Jun 7, 2009)

Market Lost said:


> I can also be blunt - the XIU sucks ... As for effort, how much effort is it to buy a few good stocks?



exactly. This is also Argo's message.

in canada it's zero effort. Quality canadian stocks are well known. Even in obscure venues like this forum, their names reverberate week in, week out. One would have to be deaf & blind to miss them.

.


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## Market Lost (Jul 27, 2016)

humble_pie said:


> lol jas4 by your reckoning my VRX has done a lot better than my XIU.
> 
> my VRX is the old biovail, more or less the same vintage, bought when biovail was $11-12-15 CAD. Today as valeant it's trading at CAD $35.82.
> 
> ...


I actually didn't realize that Valeant was Biovail, but this is just par for the course for them. They had the Chief Executive Crook Eugene Melnyk rip off investors for years, and it appears that their culture hasn't changed a bit.


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## mordko (Jan 23, 2016)

AltaRed said:


> Some retail investors can outperform the index, probably more often than not. Those willing to put in the time and effort, have adopted a strategy that works for them, and have the discipline to stay the course have a higher probablility of doing so. But as has been said before, all investors, including professional and institutional money managers, on average cannot beat the index over a period of time.


And sometimes individual investors are thinking that they are performing great by picking stocks but it's only because they are not comparing vs benchmarks properly. As we have just seen. And those who don't compare or don't look at long term returns are guaranteed to think of themselves as genius investors. Human nature.


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## gibor365 (Apr 1, 2011)

mordko said:


> And sometimes individual investors are thinking that they are performing great by picking stocks but it's only because they are not comparing vs benchmarks properly.


Maybe , My benchmark is 4 ETFs, VSC for fixed income, XIC, SPY and VEA (rest of the world). My current allocation:
fixed-income 9%, Canada 47.5%, US 40% and rest of the world 3.5%. My target respectively 20%, 40%, 30%, 10% ...

I check from time to time and outperforming my benchmark from 1 to 4%


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## mordko (Jan 23, 2016)

gibor365 said:


> Maybe , My benchmark is 4 ETFs, VSC for fixed income, XIC, SPY and VEA (rest of the world). My current allocation:
> fixed-income 9%, Canada 47.5%, US 40% and rest of the world 3.5%. My target respectively 20%, 40%, 30%, 10% ...
> 
> I check from time to time and outperforming my benchmark from 1 to 4%


That's great. I am not saying it's not possible for an individual investor to outperform the benchmark long term (at least a couple of decades). It's possible but requires a lot of research and the right temperament. I am very skeptical when people claim amazing returns when they don't even know what that means, and don't do proper comparisons vs benchmarks (HP example above). There are plenty of studies showing that individual investors who don't benchmark invariably overestimate their own success.


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## james4beach (Nov 15, 2012)

Even though I try to stock pick myself (DIVZ as well as my new XIU slicing) I am still skeptical that I can do it. I'm also skeptical that others can do it.

It's a question of long term stamina, and how market dynamics change over time. A certain theme that works in one decade (e.g. "light on commodities" lately) may not work in another decade. Mutual funds are a great example of this, and they aren't that different -- they hit upon a theme or strategy that works for a period, and then it inevitably stops working, and they drag behind market returns. Back testing also gets muddied with hind sight bias, and it's a very subtle effect.

Ultimately there is no harm in stock picking, but you should keep benchmarking and evaluating how you're doing. The time will come when you hit upon a streak (5 years? 10 years?) of doing worse than the index, and you will have to seriously evaluate your strategy. Then you have a tough question: have market dynamics changed, rendering my approach ineffective, or is this simply an unlucky patch and things will go back to working?

No easy answers. Here's an article worth reading
http://canadiancouchpotato.com/2012/05/25/why-isnt-everyone-beating-the-market/


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## Pluto (Sep 12, 2013)

humble_pie said:


> Eder does have a long history here, although alas there are a few newcomers who might not bother to respect it.
> 
> Eder is the creator of the world's tiniest beer pack portfolio, the Three-pack. Years ago Eder explained how he had set this up for his young daughter, who was then a student.
> 
> ...


that's cool. When did this Tri-pack start? 
20 year with div reinvested = Ry 9.9% annual, BCE 3%, cnr 16% 
That's not bad. If equally weighted that's 9.63%


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## james4beach (Nov 15, 2012)

Given that CNR was a rather small part of the TSX before 2002, it's impressive that anyone would have picked it. What was the rationale that led to picking CNR back at the turn of the century?


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## gibor365 (Apr 1, 2011)

> That's great. I am not saying it's not possible for an individual investor to outperform the benchmark long term (at least a couple of decades). It's possible but requires a lot of research and the right temperament.


There bunch of different strategies , some time ago I've checked historical performance of "Dogs of the Dow" and "Small dogs of the DOW" strategy... and they outperfomed index, esp small dogs of the dow with only 5 stocks...
and this strategy requires time not more than just buving and rebalancing indexes
Similar strategy exists for TSX60


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## Pluto (Sep 12, 2013)

Just some thoughts after looking at this: S&P dividend yield going back to 1880
http://www.multpl.com/s-p-500-dividend-yield/

Since 1990 the div yield has been quite low compared to pre-1990. I recall around 1990 a new philosophy emerged, and that was less emphasis on dividends based on the fact that capital gains were taxed at a lower rate compared to dividends, so retaining earnings for growth is better for the shareholder. Based on that theory the cap gains should be higher on the S&P since 1990, and the return with out dividends on the S&P up to 1990 should be lower. 
S&P 1950- 1990: 7.73% compounded annual (without dividends) 
1990 - 2016: 7.34% compounded annual (without dividends) 

Assuming my methodology is sound, it doesn't look like paying out less in dividends has resulted in greater capital gains.


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## mordko (Jan 23, 2016)

^ Keep in mind inflation. 

You should think in terms of real return rather than gross.


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## Eder (Feb 16, 2011)

Pluto said:


> that's cool. When did this Tri-pack start?
> 20 year with div reinvested = Ry 9.9% annual, BCE 3%, cnr 16%
> That's not bad. If equally weighted that's 9.63%


I started it for my daughter just over 3 years ago...I was inspired by Argo's 6 pack idea and made her a set & forget portfolio easy to drip and keep balanced. Argo is very insightful pointing out that cherry picking the TSX can be very profitable and I am in the process of shrinking the number of equities in my own portfolio to about 12....currently still at 23...


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## My Own Advisor (Sep 24, 2012)

Well done Eder.

I own about 30-40 stocks, and that's enough for me, that includes almost 10 REITs. I hope to buy more AQN and utilities as I get older - they provide services we cannot live without. 

I've recently decided to unbundle the TSX likely for the same smart reasons you and Argo believe in - it's not THAT hard to own directly the blue-chip stocks in Canada. There are only about 30 or so worth owning.


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## james4beach (Nov 15, 2012)

My Own Advisor, can I get your thoughts on my simple XIU unbundling approach that uses 7 stocks?
http://canadianmoneyforum.com/showthread.php/100322-Slicing-XIU-may-give-something-like-ZLB

I'm seeing excellent results over a full 15 years. Almost seems too easy.


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## My Own Advisor (Sep 24, 2012)

james4beach said:


> My Own Advisor, can I get your thoughts on my simple XIU unbundling approach that uses 7 stocks?
> http://canadianmoneyforum.com/showthread.php/100322-Slicing-XIU-may-give-something-like-ZLB
> 
> I'm seeing excellent results over a full 15 years. Almost seems too easy.


LOL. I just wrote on that thread 

This has been my approach to CDN dividend stock investing for the last 6-7 years. 

I feel it IS too easy. 

U.S. and international stocks, well, better to index invest - not nearly as easy to cherry-pick winners.


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## james4beach (Nov 15, 2012)

We can only hope that the Canadian market stays this inefficient, then. Time may be running out. By market cap we are now one of the largest stock markets in the world.


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## gibor365 (Apr 1, 2011)

> U.S. and international stocks, well, better to index invest - not nearly as easy to cherry-pick winners.


Agree with "international", hold VEA in one account, VGK in another + UL.
Also for emerging markets: hold DEM
For US, my core are dividend champions: JNJ, MCD, PEP, PG, T, ABBV, ABT, CVX and some more, contender LMT and AAPL , COP (who cut dividends), PSX (from COP spin off) ... also hold VTI


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## Market Lost (Jul 27, 2016)

mordko said:


> That's great. I am not saying it's not possible for an individual investor to outperform the benchmark long term (at least a couple of decades). It's possible but requires a lot of research and the right temperament. I am very skeptical when people claim amazing returns when they don't even know what that means, and don't do proper comparisons vs benchmarks (HP example above). There are plenty of studies showing that individual investors who don't benchmark invariably overestimate their own success.


You have a valid point, but I'm more concerned when you have funds, especially hedge funds that don't know how to do it. OTOH, it's not hard for a person to pull up a CAGR calculator, and compare that number to a broad-market index. At least, I think it's not that difficult, but some people know how to mess simple things up.


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## Market Lost (Jul 27, 2016)

Pluto said:


> Just some thoughts after looking at this: S&P dividend yield going back to 1880
> http://www.multpl.com/s-p-500-dividend-yield/
> 
> Since 1990 the div yield has been quite low compared to pre-1990. I recall around 1990 a new philosophy emerged, and that was less emphasis on dividends based on the fact that capital gains were taxed at a lower rate compared to dividends, so retaining earnings for growth is better for the shareholder. Based on that theory the cap gains should be higher on the S&P since 1990, and the return with out dividends on the S&P up to 1990 should be lower.
> ...


It's a bit hard to determine how valid this is as inflation, and interest rates are much lower than the historical norm, and economic growth is down right anemic. However, it does show that just paying out less doesn't necessarily lead to a higher capital gain.


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## mordko (Jan 23, 2016)

Market Lost said:


> You have a valid point, but I'm more concerned when you have funds, especially hedge funds that don't know how to do it. OTOH, it's not hard for a person to pull up a CAGR calculator, and compare that number to a broad-market index. At least, I think it's not that difficult, but some people know how to mess simple things up.


^ Yep. And remember to take dividends into account - for the index as well as your picks.


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## My Own Advisor (Sep 24, 2012)

Agreed....always need to take dividends into account as part of total return.


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## mordko (Jan 23, 2016)

Market Lost said:


> It's a bit hard to determine how valid this is as inflation, and interest rates are much lower than the historical norm, and economic growth is down right anemic. However, it does show that just paying out less doesn't necessarily lead to a higher capital gain.


Not hard in this case. It's clear that real return has been higher since the 90s because inflation has been so much lower than the 1950-1990 average.


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## Market Lost (Jul 27, 2016)

mordko said:


> ^ Yep. And remember to take dividends into account - for the index as well as your picks.


Absolutely. Not only that, it should be against a DRIP return as you want to use the maximum, frictionless return possible.


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## canew90 (Jul 13, 2016)

Pluto said:


> Just some thoughts after looking at this: S&P dividend yield going back to 1880
> http://www.multpl.com/s-p-500-dividend-yield/
> 
> Since 1990 the div yield has been quite low compared to pre-1990. I recall around 1990 a new philosophy emerged, and that was less emphasis on dividends based on the fact that capital gains were taxed at a lower rate compared to dividends, so retaining earnings for growth is better for the shareholder. Based on that theory the cap gains should be higher on the S&P since 1990, and the return with out dividends on the S&P up to 1990 should be lower.
> ...


Thanks for the chart Pluto!


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## canew90 (Jul 13, 2016)

Have mentioned that my Income has grown every since I retired, while the market returns have been up & down. so I thought I'd do a comparison. The TSX figures are from http://www.1stock1.com/1stock1_2584.htm

I've some slow growth but never a year where there was no growth (last column).


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## Pluto (Sep 12, 2013)

mordko said:


> ^ Yep. And remember to take dividends into account - for the index as well as your picks.


That wasn't really the point. The theory was lower payout in dividends = higher cap gains. Since 1990 dividend became a smaller part of total return, so it the theory is correct, one should see greater cap growth. But there was not greater cap growth. So what happened? was the retained earnings wasted? or was it not reflected in the stock price? I don't have the data to answer that. In the meantime, I'm happy with my stalwart dividend payers.


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## Pluto (Sep 12, 2013)

My Own Advisor said:


> Agreed....always need to take dividends into account as part of total return.


Well total return was not the point. This is in response to james4beaches view that dividend payers are not good investments, and that non-dividend, or low dividend payers grow more. The idea was if companies spent less on dividend payouts, did that translate into higher cap gains? 
So far, it doesn't look like it as when they actually did lower dividend payouts, the cap gains were a bit lower.


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## Pluto (Sep 12, 2013)

canew90 said:


> Have mentioned that my Income has grown every since I retired, while the market returns have been up & down. so I thought I'd do a comparison. The TSX figures are from http://www.1stock1.com/1stock1_2584.htm
> 
> I've some slow growth but never a year where there was no growth (last column).
> 
> View attachment 11673


that's very comforting. Would you care to share which companies you hold that you have the most faith in?


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## james4beach (Nov 15, 2012)

Pluto said:


> Well total return was not the point. This is in response to james4beaches view that dividend payers are not good investments


I didn't say dividend payers are not good investments. See this post of mine:



james4beach said:


> I'm not opposed to dividend paying stocks. I keep recommending XIC as one of the best ways to invest in Canada; TSX Composite has a good amount of dividends.
> 
> What I'm opposed to is a dividend yield-chasing methodology that clouds an investor's judgement to the point where they construct weird or dangerous portfolios (like heavy on energy trusts or bank shares). Sometimes when overly focused on yield, investors harm themselves. The income trust fad was exactly this, then energy trusts, followed by a hype in preferred shares.
> 
> Here's what I'm OK with -- if you are dividend focused, but can construct a portfolio that has a pretty good balance between sectors, and contains many well established large caps. However by this point I suspect you will end up with basically XIC, which you could have bought for 0.06% MER


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## mordko (Jan 23, 2016)

Pluto said:


> That wasn't really the point. The theory was lower payout in dividends = higher cap gains. Since 1990 dividend became a smaller part of total return, so it the theory is correct, one should see greater cap growth. But there was not greater cap growth. So what happened? was the retained earnings wasted? or was it not reflected in the stock price? I don't have the data to answer that. In the meantime, I'm happy with my stalwart dividend payers.


Man, for the 5th time, you ignored inflation. If you look at real returns you will come to the opposite conclusion using the exact same example.


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## Pluto (Sep 12, 2013)

mordko said:


> Man, for the 5th time, you ignored inflation. If you look at real returns you will come to the opposite conclusion using the exact same example.


You could be correct. Why don't you provide the real return data?


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## Pluto (Sep 12, 2013)

james4beach said:


> I didn't say dividend payers are not good investments. See this post of mine:


OK. But in other posts previously it sounded like you were in favor of low div or zero div based on the idea that using retained earnings for growing the business was better than paying out a percentage in dividends. Any way, keep researching and refining strategies.


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## Nelley (Aug 14, 2016)

Pluto said:


> OK. But in other posts previously it sounded like you were in favor of low div or zero div based on the idea that using retained earnings for growing the business was better than paying out a percentage in dividends. Any way, keep researching and refining strategies.


I think what you guys are missing is that what is good for management (growth of the company) is not necessarily good for you as the equity investor. As an investor, what you want is PROFITABILITY- which is very different from GROWTH. Management often wants growth at all costs, because a larger company translates into higher management renumeration.


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## canew90 (Jul 13, 2016)

Pluto said:


> that's very comforting. Would you care to share which companies you hold that you have the most faith in?


6 major banks
3 Utilities
2 pipelines
3 communications
2 industry
2 ins/financials

I have 14 of the above with my 17 holdings and they provided the majority of my dividend growth and made up for the cuts from two of my holdings.


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## canew90 (Jul 13, 2016)

Nelley said:


> I think what you guys are missing is that what is good for management (growth of the company) is not necessarily good for you as the equity investor. As an investor, what you want is PROFITABILITY- which is very different from GROWTH. Management often wants growth at all costs, because a larger company translates into higher management renumeration.


There has to be a happy medium and that's why I want to get a growing dividend. The company can't continue to pay a growing dividend unless they are growing their earnings and hopefully having company growth as well. If you check out the TSX chart I posted capital growth does not always happen each year and often the index takes years and a few good years to obtain the average 7% growth.


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## Nelley (Aug 14, 2016)

canew90 said:


> There has to be a happy medium and that's why I want to get a growing dividend. The company can't continue to pay a growing dividend unless they are growing their earnings and hopefully having company growth as well. If you check out the TSX chart I posted capital growth does not always happen each year and often the index takes years and a few good years to obtain the average 7% growth.


My point is that the argument-the company doesn't pay a dividend because it makes more sense to reinvest the capital in "growth" often hides slowing or non-existent profitability which is covered up by accounting B/S. Nortel was a great example of this.


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## mordko (Jan 23, 2016)

mordko said:


> Man, for the 5th time, you ignored inflation. If you look at real returns you will come to the opposite conclusion using the exact same example.





> You could be correct. Why don't you provide the real return data?


Average annual inflation for years 1950 - 1990 = 4.3%
Average annual inflation for 1991-2015 = 3%

On average you needed a 1.3% extra growth in capital during 1950-1990 period to compensate for inflation. In fact, based on the numbers you are quoting there was 0.4% extra growth. Pre-1990 the real growth in capital fell 1% short. 

Obviously I am approximating, but you get the gist.


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## agent99 (Sep 11, 2013)

Nelley said:


> I think what you guys are missing is that what is good for management (growth of the company) is not necessarily good for you as the equity investor.


That is SO true. Don't you hate getting those annual meeting documents that are mainly about how much more the management are going to pay themselves. Even when the company has no profitability.


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## Pluto (Sep 12, 2013)

mordko said:


> Average annual inflation for years 1950 - 1990 = 4.3%
> Average annual inflation for 1991-2015 = 3%
> 
> On average you needed a 1.3% extra growth in capital during 1950-1990 period to compensate for inflation. In fact, based on the numbers you are quoting there was 0.4% extra growth. Pre-1990 the real growth in capital fell 1% short.
> ...


Alright I get the point. There seems to be 0.4% real return advantage in cap gains if we do not look at it in total return terms. Now, as My Own Advisor recommended, total return seems relevant. I think it is possible that some of those high yield years pre 1990 might tip the balance back the other way.


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## mordko (Jan 23, 2016)

No, the real return advantage on capital gains for 1991-2015 vs 1950-1990 was 0.9%.


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## mordko (Jan 23, 2016)

And yes, of course, you need to look at the total return. That's the whole point of this discussion.

And there are other factors why total return may be better during this decade or another (innovation, trade, taxation, borrowing and inflation play a major part to name just a few factors). 

My point was that your little theorem does not prove anything.


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## Pluto (Sep 12, 2013)

mordko said:


> No, the real return advantage on capital gains for 1991-2015 vs 1950-1990 was 0.9%.


Well in one post you wrote .4, then in this one, out of the blue, you have .9


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## Pluto (Sep 12, 2013)

mordko said:


> And yes, of course, you need to look at the total return. That's the whole point of this discussion.
> 
> And there are other factors why total return may be better during this decade or another (innovation, trade, taxation, borrowing and inflation play a major part to name just a few factors).
> 
> My point was that your little theorem does not prove anything.


Maybe. but you are not supporting your conclusion. I'm not convinced that retaining earnings for "growth" ends up with the investor ending up with more vs taking some of the profits in dividends.


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## Pluto (Sep 12, 2013)

Nelley said:


> I think what you guys are missing is that what is good for management (growth of the company) is not necessarily good for you as the equity investor. As an investor, what you want is PROFITABILITY- which is very different from GROWTH. Management often wants growth at all costs, because a larger company translates into higher management renumeration.


By "growth" it was meant increasing earnings and revenues which, I think, is the same as profitability.


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## Pluto (Sep 12, 2013)

canew90 said:


> 6 major banks
> 3 Utilities
> 2 pipelines
> 3 communications
> ...


I'm trying to figure out how one could improve on this, but can't think of anything.


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## mordko (Jan 23, 2016)

I will try to type a bit slower. Annual capital growth pre 1990 was 0.4 percent higher. Once we correct for inflation, annual capital growth was 0.9 percent lower prior to 1990 than after 1990.


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## mordko (Jan 23, 2016)

Pluto said:


> Maybe. but you are not supporting your conclusion. I'm not convinced that retaining earnings for "growth" ends up with the investor ending up with more vs taking some of the profits in dividends.


That's not what I said at any point in this thread or elsewhere. This very much depends on specific circumstances. It is up to the company reinvesting profit to demonstrate this to be the case. My point is that with some in this thread claiming 6 percent distributions within their dividend portfolios, they are ending up with very specialized portfolios and taking on more risk than they seem to realize.


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## Eder (Feb 16, 2011)

I think most dividend investors on here are happy with 3-4% yield along with 7-10% dividend growth. 6% portfolio yield is another animal that I wouldn't have the stomach for.


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## gibor365 (Apr 1, 2011)

Eder said:


> I think most dividend investors on here are happy with 3-4% yield along with 7-10% dividend growth. 6% portfolio yield is another animal that I wouldn't have the stomach for.


True! Just checked.... my total yield on Jan 1 was 3.9%, now around 3.75%



> My point is that with some in this thread claiming 6 percent distributions within their dividend portfolios


 yeap, somebody can have 6% + for a short time, but very likely it will go down to 3-4% because some stocks will cut/suspend dividends


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## agent99 (Sep 11, 2013)

gibor365 said:


> True! Just checked.... my total yield on Jan 1 was 3.9%, now around 3.75%
> 
> yeap, somebody can have 6% + for a short time, but very likely it will go down to 3-4% because some stocks will cut/suspend dividends


Your post prompted me to check our overall distribution yield (2 taxable, 2 rrifs, 2 TFSA a/cs) . Over past 13 years, it has varied from low of 4.52% in 2012 to a high of 6.77% in 2008! That was obviously an outlier because of the market crash, but on average our portfolio produced a cash flow equivalent to about 5.25% since 2003. This is not "yield" in the true sense, because portfolio includes premium bonds as well as growth stocks that may balance out the gains & losses. So, in simple terms, if we has $100k in our portfolios, it would be producing annual cash flow of $5.25k that we can spend or re-invest. Portfolio is mostly run of the mill dividend payers, corporate bonds, mid caps stocks and convertible debentures. It can be done!


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## Pluto (Sep 12, 2013)

mordko said:


> I will try to type a bit slower. Annual capital growth pre 1990 was 0.4 percent higher. Once we correct for inflation, annual capital growth was 0.9 percent lower prior to 1990 than after 1990.


OK. but you still didn't include dividends. Maybe with dividends included, the conclusion will be different.


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## mordko (Jan 23, 2016)

1950 to 1990 annualized inflation adjusted return - 7.6 percent
1991 to now - 6.9 percent.

This is for S&P 500, and what these numbers really reflect is that more recently the economy has been growing slower as population ages, productivity growth slows, state baloons and the US is becoming less dominant in the world market.

In 1950 you were also coming off the worst recession in history followed by the war, so the shares were recovering lost ground.


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