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  • Are Dividends A 'Bonus'? - Yet Another View [View article]
    To all, I appreciate the healthy (and, for the most part) congenial discussion of this analysis. Your comments have also deepened my thinking and understanding about why this has become such a contentious (and per overdiscussed) issue. I think there is more common ground here than it appears, but the discussion needs to be brought back to the core issue.

    The first important step to do this is to keep the matter of what would or would not have happened to the cash if a company did or did not pay a dividend as a separate issue. That question sends all of us deeply into the realm of speculation and emotion and really has nothing to do with the narrow matter of the ex dividend adjustment. Let's face it...if there's been one, the train has left the station...a dividend has been paid so any discussion about what would or wouldn't have happened with that cash becomes moot. There are plenty of other places to argue this issue.

    As to the issue of whether companies the pay dividends have some sort of steady market value premium solely related to the dividend, while it's a very interesting question (about which I expressed an opinion above...I think they do...and as Dave points out, this may be what Chuck Carnevale is observing), it muddies up the waters again on this narrow issue.

    When financial professionals and academics say that the ex-dividend adjustment is permanent, they are looking at the event itself narrowly (almost as an accounting issue) and ignoring the secondary effects of dividend payments. In this context, I am certain the price adjustment is indeed permanent. And by permanent, it means that the price does not ratchet endlessly up or down as each side has argued, but simply returns to some level of parity after each dividend. I think everyone can accept this as being true without ceding any territory as to whether or not dividends enhance the value of a stock. Perhaps this will help everyone move on.

    A final note...I've actually been sitting on this analysis for a couple of years...which is the last time I wrote an article. No other ideas left in my closet right now so I guess it's back to hibernation mode. Setting aside the philosophical disagreements I've had with some of you, I am glad to see you are still here and engaged and that you are hopefully healthy and making enough money to live the life you want to live, whatever your investment philosophy.
    Jun 7, 2014. 10:32 PM | 3 Likes Like |Link to Comment
  • Are Dividends A 'Bonus'? - Yet Another View [View article]
    Robert, not looking to get into one of those back and forths with you here but I do want to extend the PG example a bit. I eyeballed the PG dividend and I would guess that over the last 50 years that they have probably paid about $100 billion in dividends. PG's current market value is just over $200 billion so, humoring me for a second, if PG had never paid a dividend but did everything else the same and the market did value the cash at par, PG would be trading at about 150% of its current value, a large but not a radical difference.

    Interestingly, regardless of how the market would value it, that +/- $100 billion is the exact cumulative amount of ex dividend price adjustments that have been made to PG, isn't it? I agree it can certainly be argued that if PG had $100 billion of additional cash on it balance sheet whether the market would value it at exactly $100 billion. It could be more than $100 billion, it could be less, but it would certainly be something substantial. Beyond that, not paying a dividend might well have a some kind of negative effect on the underlying value of PG and there may be some other pluses and minuses to consider, but all in all, it would be very hard to argue that PG would not be trading at a significantly higher price with everything the same except an additional $100 billion in cash (I am open to any arguments that don't rely on general phrases to the effect "it's hypothetical so it is invalid" or "you never know how Mr. Market will look at it"). OTOH, if you choose to consider this from the perspective I laid out, it will give you some insight as to why the ex dividend price adjustment is permanent and why this can be true even if the stock is trading at an all time high.
    Jun 7, 2014. 10:29 PM | 1 Like Like |Link to Comment
  • Are Dividends A 'Bonus'? - Yet Another View [View article]
    PG has been able to grow its business well above and beyond the dividend amount...that is why it is trading near an all time high. The question is, had PG never paid a dividend and all other financial activities were held constant over those 50 years (buybacks, debt levels etc), how much more would the market be willing to pay for it than it currently is. Well, the only difference would be that PG would have a larger cash balance equal to all those unpaid dividends, right? Presuming the market only values that cash at par, then PG would be trading at its current price plus the sum of all the dividends it would have paid over the 50 years. One could go back and calculate this then divide it by the current number of shares outstanding. It may not be as nearly much as you think because PG's dividend 50 years ago was probably less than a penny per current share. So Robert, it is very plausible PG has paid dividends for 50 years and is still nearing a record high valuation.

    Retail, while what you are saying may be true, it is not really directly relevant to the ex dividend transient versus permanent issue. To extend my example, if the market believed PG could take this cash from unpaid dividends and invest it in profitable activities then it would value the cash at some multiple. Perhaps they might have wasted the money as giorgio implies. In either case, the impact on market and/or intrinsic value would be aside from the ex dividend issue. I just don't want anyone to get confused by this as I think it clouds the discussion.
    Jun 6, 2014. 11:13 PM | Likes Like |Link to Comment
  • Are Dividends A 'Bonus'? - Yet Another View [View article]
    Dave, thanks for commenting. Retailinvestor has correctly identified the methodology I used to create the graph. The price of SPY goes up and down with the S&P 500 index but there is a small differential in pricing that accumulates through a quarter and at its maximum immediately pre ex dividend, it is almost exactly equal to the dividend amount. This differential disappears with the ex dividend adjustment for SPY. The cycle then begins again.

    As to the last paragraph of your comment as to whether SPY owners (really buyers and sellers) are specifically taking into account the accumulating dividend stockpile when creating this pricing differential, yes, the SPY dividend payment is being somehow considered and priced in but I can't definitively link it to whatever the accumulated dividends are from time-to-time without analyzing a great deal more data (it is also data that I don't have access to). As retailinvestor astutely points out in a comment above though, SPY's dividend accumulation is really no different from the way dividend paying companies accumulate cash through a quarter selling goods and services at a profit and then pass that cash onto their shareholders when the dividend is paid. If you accept these as equivalent, then it would certainly seem to indicate that the repricing on the ex dividend date is not temporary and transient, but permanent.

    Let me go beyond this just a bit though. Accepting this does not mean that you need to give up your belief that dividend stocks trade at some relatively constant modest premium to non dividend paying stocks (all other variables held equal and constant). I happen to think this is the case based on the concept of present value alone. The problem is that if what some of your dividend growth counterparts assert is true about ex dividend adjustments being transient, then this dividend stock premium would not be relatively constant but would be ever expanding. That is not the case and this analysis provides support for that conclusion.
    Jun 6, 2014. 10:39 PM | 2 Likes Like |Link to Comment
  • Are Dividends A 'Bonus'? - Yet Another View [View article]
    Mike, yes, you are just viewing the data I presented in a different manner. It just seems that you are reaching a different conclusion as to what it means. Please see my comment to Robert below for some additional color.
    Jun 6, 2014. 09:12 AM | 1 Like Like |Link to Comment
  • Are Dividends A 'Bonus'? - Yet Another View [View article]
    Robert, thank you for finding this article significant enough to comment on. This was not meant to be an ambitious article with far ranging conclusions. Over the past couple of years, there has been an ongoing debate as to whether or not ex dividend price adjustments result in a permanent reduction in the value of a company and whether the market pricing of a company reflects this. I believe that debate began a couple of years ago when an article by Chuck Carnevale postulated that perhaps dividends are a "bonus"; that the market, in fact, "unadjusts" the adjustment in a fairly short period of time such that a stock trades at the same price it would have whether or not the dividend not been paid. Since then, a number of financial professionals have attempted to disprove this through a variety of approaches focusing on individual stocks. Proponents of Chuck's postulation have often thwarted these attempts by saying that it is impossible to tell because the actions of the market and other non-dividend related issues obscure the part of the stock pricing that is related to the dividend. This analysis was simply targeted to address that objection and I believe it does show that, in fact, ex dividend adjustment "sticks" in the market value of a stock. I don't expect this to end the debate, but I hope it added a different perspective to the discussion.

    Your point on any individual stock is well taken and, indeed, I am sure that most, if not all stocks stray to some degree from the saw tooth pattern. But it would seem to me that, on average, every for every stock that strays from the pattern in the positive direction, there must be one or more that are straying in a negative direction meaning not only is the dividend not a bonus, but it may detract from a stocks market value even more than the ex dividend adjustment. I can put forth Apple as a possible example of this. When Apple started to pay a dividend, there was a great deal of commentary that this was a sign that Apple was no longer a fast growth company but was instead converting to a mature steady growth company. This significantly and negatively affected its price....likely far beyond its ex dividend adjustment. Nonetheless, over an extended period of time, I would bet that, if you could strip out the other price action, and isolate the dividend, you would see the stock gravitating on either side of reverting to parity ex dividend. Thank you again for your comment.
    Jun 6, 2014. 08:54 AM | Likes Like |Link to Comment
  • Are Dividends A 'Bonus'? - Yet Another View [View article]
    Thanks Varan. I am expecting some additional fairy tales to attempt to refute the obvious and it appears we have gotten one below. I have no problems with dividend growth investing and even practice it to a limited extent. There are many good attributes to the approach but there still seems to be a penchant by some of its practitioners to twist the rules of basic math and finance to make it appear even better than it is. It's not necessary.
    Jun 5, 2014. 10:50 PM | 4 Likes Like |Link to Comment
  • Are Dividends A 'Bonus'? - Yet Another View [View article]
    User blah blah...first the analysis is correct, it is just the conclusion that you are drawing from the analysis that is different (and IMO totally incorrect). Second, clearly you are confusing mutual funds with ETF's. Mutual funds report daily asset values inclusive of cash on hand. ETF prices are set by the market. Third, the last line of your first paragraph is nonsensical and has no logical link to your initial sentences or the point of the article. Finally, I am looking at "price differentials" and not "prices" so the "going down" is relative to the price of the index. Looks like its back to the drawing board buddy.
    Jun 5, 2014. 10:45 PM | 1 Like Like |Link to Comment
  • Dividend Growth: Managing Income, Reducing Total Return [View article]
    Very well written article Cranky! I will be curious to see the results of your Chowder analysis. BTW, why does Tim Hortons put so much sugar in their oatmeal?
    Mar 5, 2014. 08:27 AM | Likes Like |Link to Comment
  • Reversion To The Mean Phenomenon: Part I [View article]
    "Similarly, if a Treasury bond is yielding 5 percent, and rates rise to 10 percent, if an investor sold that bond the return would be well below 5 percent, but future returns to holders of that bond would be 10 percent. In both cases returns reverted to the mean of 10 percent."

    Uh...Larry...I think the second investor's mean would revert to 5%, right? This really isn't "mean reversion" eiher but I'll let it pass as I understand the point you are trying to make.
    Feb 19, 2014. 08:03 AM | 2 Likes Like |Link to Comment
  • Sam Zell Thinks Most REITs Aren't Relevant, Except His Of Course [View article]
    Brad, with all due respect, you spent as much space within your article trying to discredit Zell by rehashing the Tribune episode and pointing out blips in the dividend histories of two of his REIT's without noting any of his many successes. To try to say your point was only having a difference of opinion of the number of REIT's there should be is, I am sorry to say, at best disingenuous. Very disappointing....
    Feb 12, 2014. 07:40 PM | 1 Like Like |Link to Comment
  • Sam Zell Thinks Most REITs Aren't Relevant, Except His Of Course [View article]
    Brad, I like and respect your analytical work on REIT's although I often have to look past your filler pandering to the dividend crowd here on SA, but hey, I know that's how you generate hits. Nonetheless, you have gone astray here. There are many points I could make about things you neglected to say or not say about Mr. Zell...for example his foresight and bravery in selling EOP to Blackstone at the top of the market to the great benefit of its shareholders and the fact that Ventas recovery was accomplished under his umbrella (yes with Cafaro's outstanding leadership within it), but this would be an extremely long post and it's not worth the effort.
    I have met Mr. Zell and, in fact had the unique pleasure of spending a few hours with him about 20 years ago when I was interviewing for a job. I consider it one of the highlights of my business career. Like him or not, he is privately what he is publicly....there is no false pretense...a trait I greatly respect. My recollection is that he uses one of two expletives to describe people he likes (a two word phrase that starts with an A) and dislikes (a word that starts with an F). If he bothered to care what you thought about him, little doubt which word he would use...not that you would care either it seems.
    Feb 11, 2014. 11:07 AM | 3 Likes Like |Link to Comment
  • The Importance Of Consecutive Dividend Increases In Stock Selection [View article]
    For those interested, another view on this topic:
    Feb 8, 2014. 08:42 AM | Likes Like |Link to Comment
  • Have Index Funds Become Too Popular? [View article]
    Larry, great article to promote discussion. IYO is it passive or active investing if someone buys, say, an equal weighted index?
    Dec 27, 2013. 09:09 AM | Likes Like |Link to Comment
  • Municipal Bonds: The Other 99.95% [View article]
    Chritopher, as a contributor here, although a dormant one, I do appreciate how much work it takes to write an article. Of course, I was often lambasted in the comments because I tried to get readers to think out of the box...that's not such a positive experience either. Nonetheless, I thank you for writing about this neglected topic and for responding to my comment.

    The leveraged CEF I bought represents less than 2% of my muni holdings so I am just working around the edges. As I am sure you know, many muni CEF's are trading at statistically significant deep discounts due to people cutting and running. I think the interest rate dynamics as QE winds down will actually be modestly favorable for the leveraged funds...just a hunch so that's why I opened a position and am thinking about increasing it a bit. The TOB uncertainty has me a bit rankled though but what you are saying seems to be the consensus...something will be figured out to replace the liquidity facilities backing the TOB's. Thanks again and happy holidays...
    Dec 20, 2013. 05:12 PM | Likes Like |Link to Comment