[Rickson9]

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

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

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

 

[refutor]

Wwe

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

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

 

[Sampson]

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

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

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

 

[OntFA]

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

 

[Cal]

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

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

Just a quick opinion...

 

[Rickson9]

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

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

 

[Rickson9]

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

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

Just a quick opinion...

Good summary. Thanks Cal.

 

[Rickson9]

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

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

 

[OntFA]

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

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

 

[Rickson9]

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

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

 

[leslie]

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

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

 

[bean438]

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

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

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

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

Lots of reasons to love dividends.

 

[Jon202]

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

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

 

[Rickson9]

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

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

 

[Rickson9]

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

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

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

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

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

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

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

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

 

[leslie]

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

 

[bean438]

Rickson how can "safety" not be a benefit?

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

 

[Rickson9]

Rickson how can "safety" not be a benefit?

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

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

 

[bean438]

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

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

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

 

[OntFA]

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

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

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

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

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

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

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