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Will the S&P 500 peak this year, and then be lower for next couple years?

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I may be misinformed, but "the market" has been the standard to beat for years has it not? I'm an index investor, I don't think there are any dividend funds that have outperformed the broad index funds, even when accounting for dividends being reinvested? If so, I've been doing it all wrong for years.
Yes and no.

"The market" is a common benchmark, and makes sense in a lot of cases.
However I don't think it's necessarily the right benchmark for a specific persons individual needs.

Lets say your purpose is capital appreciation over a 30 year period.
Would you be happy with the market returns of the Nikkei? near zero

Or the TSX over the last 15 years (50% capital appreciation)

I think when you look at portfolios, a mixed cash/bond/equity portfolio actually performs very well, at much lower risk and volatility than a pure equity portfolio.


For the individual, volitility and risk is a real concern. It's easy to say a 20-30% drop won't bother you, but wait till you're 60 and that 30% drop is $300k gone.

I think that this focus on maximum returns, and ignoring volatility/risk, is bad.
I think at the individual level, it's like hedge funds forgetting that shorting stocks has "theoretically" unlimited risk.


I'm not trying to "beat" anything. I'm trying to get a good return at reasonable risk & volitility.
 

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@MrMike Try this. Pick the biggest market caps in the TSX with >2% dividends and 20 years history. Backtest their total return. Then pick the biggest market caps in the TSX with <2% dividends and 20 years history. Backtest their total return. The latter is growing much faster, so it's totally safe to sell stocks for income and you'll actually end up with even more wealth. But this is a big debate.
 
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Yes and no.

"The market" is a common benchmark, and makes sense in a lot of cases.
However I don't think it's necessarily the right benchmark for a specific persons individual needs.

Lets say your purpose is capital appreciation over a 30 year period.
Would you be happy with the market returns of the Nikkei? near zero

Or the TSX over the last 15 years (50% capital appreciation)

I think when you look at portfolios, a mixed cash/bond/equity portfolio actually performs very well, at much lower risk and volatility than a pure equity portfolio.


For the individual, volitility and risk is a real concern. It's easy to say a 20-30% drop won't bother you, but wait till you're 60 and that 30% drop is $300k gone.

I think that this focus on maximum returns, and ignoring volatility/risk, is bad.
I think at the individual level, it's like hedge funds forgetting that shorting stocks has "theoretically" unlimited risk.


I'm not trying to "beat" anything. I'm trying to get a good return at reasonable risk & volitility.
All valid points. I was simply trying to illustrate the math behind the "dividends make no difference" theory. It is a bit of an illusion that you are preserving your assets when you are living off your dividend income.
 

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All valid points. I was simply trying to illustrate the math behind the "dividends make no difference" theory. It is a bit of an illusion that you are preserving your assets when you are living off your dividend income.
The thing is when a company gets $1 in Free cashflow, what should they do?
Give it to owners, or invest it in something new, or buy stock.

If they have a good IRR, maybe they should invest it, if they don't they should give it to owners in some way.

I think some companies have enough projects to get a good return on every dollar they reinvest.
I think some companies do not have enough high return internal investments, and should simply give that money to the owners.

I think intel and Ford should be doing more internal investment.
I think Apple should be distributing it's cash hoard.

I own all 3.
 

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Discussion Starter #65
I understand the price drops by the dividends but that quickly reversed by daily trading
It isn't, though. The price drops and definitely stays dropped. If it was immediately rebounding how you say, then dividends would be a perpetual motion machine of free money ... you could take $500 million out of a company for dividend payments and the company would be valued as it was before.

How could that make sense? In such a world, a company would send millions of $ of cash going out the door with no impact to its valuation.

In fact many people attempt to try and take advantage of the claim you are making. They buy the shares before a dividend, take the cash, and then sell. It just doesn't work; you can't make money doing that.
 

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Discussion Starter #66
I understand the price drops by the dividends but that quickly reversed by daily trading. If you ask most people, they wouldn't know that the price drops when a dividend is paid because it's not noticeable and therefore, irrelevant even if it's true.
I want to point out an important statistical thing. The share price does indeed move after the dividend - you're right about that. But the movements are not a systematic increase or rebound in price. They are random/daily noise on top of the share price drop.

You are seeing two price movements happen simultaneously:
(A) guaranteed share drop on the ex dividend date
+
(B) random daily noise, which statistically is net zero

You wrote "it's not noticeable and therefore, irrelevant" which is the key to this. This is the faulty assumption people make.

In the daily price pattern, you observe (A) + (B) which does indeed obfuscate the effect of (A) happening. As you say "it's not noticeable"

But nevertheless, (A) is still very much relevant. The reason is statistical:
(A) is guaranteed negative
(B) is random but averages to zero

So what is the result when you add those? On average I mean, after many instances. And this can easily be shown numerically with real prices... and I've shown it before.
 

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In fact many people attempt to try and take advantage of the claim you are making. They buy the shares before a dividend, take the cash, and then sell. It just doesn't work; you can't make money doing that.
Maybe you mean broadly but I have done this 3 or 4 times. It can totally work. I bought XTR so I could get the exdate on the 23rd. Then sold at a profit, then put it into ZWC for the exdate of 28th, again at a profit. Then I moved it to ENB for the following month on the 15th. I don't do it often, just when i have a large sum to put in and I see if this is something I could do. I admit, there is a risk of the stock falling in price but not necessarily because it's paid its dividend - the price could fall just because people are selling.

All I'm saying is that the price going down, there's no point in even concerning yourself with it because:
  • the price change is so small it blends into normal market volatility, and/or
  • maybe people in the after hours market buy up the stock when it pays out dividends, raising the price
 

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Discussion Starter #69
I admit, there is a risk of the stock falling in price but not necessarily because it's paid its dividend - the price could fall just because people are selling.
I think you are seeing the random unpredictability of the market over multiple instances. There are definitely cases where you'll see a gain by purchasing before the ex date, and selling after.

As I posted above, it's a statistical thing. Do this long enough and it will give you a net zero outcome, meaning on average, what you make from the dividends you will lose in the share price. Dividends aren't free money.

Consider the implications if you are correct, that you can just harvest the dividend. Here is what every hedge fund on earth would do:

1. they would borrow $10 million the day before the ENB dividend
2. would collect their $190,000 cash payment
3. immediately sell after

For such a one or two day loan, the interest cost on the $10 million would only be $500 or something like that.

Wouldn't that be a free money machine, if it were true? The hedge fund would walk away with $189,500 of free profits every time there's an ENB dividend.
 

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Mr Mike said:
Can someone correct me if I'm wrong (along with a reason why haha) but I hear this argument a lot and while it may be technically true, in practice, receiving dividends is clearly the better option
This subject has been discussed many many times. But there are likely new participants who were not involved.

My observation is that some participants compare apples with oranges.

The premise is that if a company pays a dividend it reduces the remaining value of the company. True, but only at that instant in time. The dividend is now in the hands of the shareholder and he/she can do whatever they want with it.(Maybe buy Gamestop shares and make a fortune) If somehow someone could create an absolute clone of that same company, then a comparison could be made between what the investor receiving the dividend does with the money and what the management of the company would do with it if it is left in the company. (they may not buy Gamestop!) But those clones are imaginary. It is not possible to compare imaginary with real companies.

A lot of those arguing against dividends likely haven't yet been in a situation, as many retirees are, where cash flow is king. Portfolio value not so much so,
 

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A lot of those arguing against dividends likely haven't yet been in a situation, as many retirees are, where cash flow is king. Portfolio value not so much so,
I still look at my portfolio on a Total Return basis 15 years into retirement. True, a portion of my annual Total Return is in recurring investment income (cash flow), about 3% yield on portfolio value to be more specific, but the additional 6+% over the past 10 years has been in share (capital) appreciation. I wouldn't leave home without it.

With a VPW allowance factor of about 5.5%, that means I can withdraw about half of it in (more certain) recurring investment income and half of it (if I need to) in capital sales. Works for me.
 

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where cash flow is king. Portfolio value not so much
Top 10 TSX stocks by market cap with >2% dividends, rebalanced annually.
Simulation of a portfolio starting value of $1,000,000 and withdrawing a fixed amount of $4,000 per month, adjusted for inflation, for 30 years.
Success rate of 87.90% to reach the 30th year.
Median portfolio end balance, real (inflation adjusted) : $3M.
Safe withdrawal rate at the 10th percentile : 4.64%.

Top 10 TSX stocks by market cap with <2% dividends, rebalanced annually
Simulation of a portfolio starting value of $1,000,000 and withdrawing a fixed amount of $4,000 per month, adjusted for inflation, for 30 years.
Success rate of 99.85% to reach the 30th year.
Median portfolio end balance, real (inflation adjusted) : $118M.
Safe withdrawal rate at the 10th percentile : 10.83%.

What am I missing?

Simulations :


 

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You are seeing two price movements happen simultaneously:
(A) guaranteed share drop on the ex dividend date
+
(B) random daily noise, which statistically is net zero
There is a further confounding factor: It is the fact that, on average, the market tends upward. This means there is a greater likelihood of seeing the dividend drop get masked by a general market increase.

Maybe you mean broadly but I have done this 3 or 4 times. It can totally work. I bought XTR so I could get the exdate on the 23rd. Then sold at a profit, then put it into ZWC for the exdate of 28th, again at a profit. Then I moved it to ENB for the following month on the 15th.
Further to the point above, you are describing three "successes" during a boom. The upward lift was provided by a soaring market, not because investors were ignoring the cash going out the door.
 

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Interesting analysis Mr B. Did you chose the top 10 stocks at the beginning of the 30 yr period or the end?
 

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Discussion Starter #75
There is a further confounding factor: It is the fact that, on average, the market tends upward.
On the time span of the few days surrounding the ex dividend date, this is negligible. Yes it's true there is a very slight upward bias. You can calculate it ... something like +8% over 200 trading days = 0.04% upward bias over a single day.

It really comes down to daily market noise which masks the effect of the dividend drop. It is very easy to "undo" the noise and random daily changes, and then you can clearly see the share price drop due to dividends.

Every dividend harms the share price, knocks it down. And when you get paid a dividend during a down market (like during a bear market) the harm to your equity holdings is quite substantial... it forces the share prices to get knocked down even further.
 

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Top 10 TSX stocks by market cap with >2% dividends, rebalanced annually.
Simulation of a portfolio starting value of $1,000,000 and withdrawing a fixed amount of $4,000 per month, adjusted for inflation, for 30 years.
Success rate of 87.90% to reach the 30th year.
Median portfolio end balance, real (inflation adjusted) : $3M.
Safe withdrawal rate at the 10th percentile : 4.64%.

Top 10 TSX stocks by market cap with <2% dividends, rebalanced annually
Simulation of a portfolio starting value of $1,000,000 and withdrawing a fixed amount of $4,000 per month, adjusted for inflation, for 30 years.
Success rate of 99.85% to reach the 30th year.
Median portfolio end balance, real (inflation adjusted) : $118M.
Safe withdrawal rate at the 10th percentile : 10.83%.

What am I missing?

Simulations :


I don't think you can run the top 10 stocks today backwards 30 years. You would have to backtest the top 30 stocks from 1991 to today.
 

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Interesting analysis Mr B. Did you chose the top 10 stocks at the beginning of the 30 yr period or the end?
I chose stocks with 20 years of history but the simulation is on 30 fictive years.

I chose the stocks based on their market cap as of today, so it's biased in that sense, you are right, I admit. I cannot disagree.

BlackRock will allow me to look at the components of XIU since 2006 so I could try to pick the top from that list, but it's a bit more complex as some have been absorbed by others. But all the stocks I selected are part of the bigger XIC.

Anyways, my understanding is that most stocks giving >2% dividends are slowing in growth and considered more stable, whereas stocks giving <2% dividends usually still have room for growth and are considered more volatile. Though I'd just say that a stock from a well managed company with a long track record and big market cap should be considered as stable as any other similar stock giving a dividend or not. And since low-dividend stocks are usually growing faster than high-dividend stocks, then it's totally safe to use those low-dividend stocks for income.

In my opinion, now that we have hindsight over more than 20 years, the best stocks were CNR, MRU, TIH, BAM, which are all low dividends stocks.

My only way to make this analysis fair is to accept the hindsight bias and compare the absolute best high-dividend stocks of the past 20 years to the absolute best low-dividend stocks of the past 20 years, and the low-dividend wins on the long run.

 

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Discussion Starter #78
My only way to make this analysis fair is to accept the hindsight bias and compare the absolute best high-dividend stocks of the past 20 years
You might be interested in some of the analysis from Ben Felix. He adjusted for the different factor tilts of some of these well known dividend portfolios. I believe that once he adjusted for things like small/large cap and growth/value factors, that he found the same performance from the dividend portfolios as the broad market.
 

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There is a further confounding factor: It is the fact that, on average, the market tends upward. This means there is a greater likelihood of seeing the dividend drop get masked by a general market increase.
^ exactly my point :)

Further to the point above, you are describing three "successes" during a boom. The upward lift was provided by a soaring market, not because investors were ignoring the cash going out the door.
1) I've describe 1 instance. I've done that 3 times.
2) You can't say I did that during a boom.... you don't know when I did this, right :p

But for the record, the first time I did this was during August 2020... was that the boom? or it was still during the pandemic though you could say things already hit bottom and were more likely to go up than back down. But you're proving my point, the price going down after dividends is irrelevant if the price goes right back up shortly after which is [mostly] does (assuming its a good company).
 

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I don't think you can run the top 10 stocks today backwards 30 years. You would have to backtest the top 30 stocks from 1991 to today.
Yes, that is a weakness that I mentioned in post #74 above. A bit like picking winners in a horserace after the race is over :)

I recall Nortel being a major part of TSX. It transitioned from being a dividend payer to a non-payer before it fell off the cliff! Mr. B's analysis would be hard to do if top 10 of 30 yrs ago had to be chosen. Many have disappeared or stopped paying dividends. This old article covers some: List of dividend-paying firms shrinking.

Nevertheless, although I did not go through Mr B's analysis in detail, I was impressed that sophisticated tools like that are available. However, I would like one that looks forward 10 years :)

Our own experience of DIY investing is over ~18 years.
  • (60-70)/(40-30) Equity/FI , on average ~95% of Equity in Div Payers, mostly Canada, some foreign.
  • 50/50 Reg/Unreg
  • Draw ~4% initially, reducing to ~3% as portfolio has grown. We draw what we need after CPP/OAS.

This resulted in approx 90% overall growth in portfolio value (This includes the 40% FI component)

Our horizon is about 10years, so I think I will stay with my plan! However, I will soon need to find someone who will take over :(
 
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