Dripping Works: A Real-World Example [View article]
Todd,
I am not sure this is a productive conversation. To me you are making premises and assumptions and generalizations that render your questions and comments shaky. I will try to keep my answers short and direct and just have them pertain to me. Whatever generalizations you want to draw about DG investing is up to you.
"First, in your original reply to my post, you chose to play semantics regarding "new money"."
It's not semantics to me. New money is money coming in from outside. Money produced by the investment itself is not new money. That's the reason my demonstration Dividend Growth Portfolio is a "pure" demonstration: Its results come solely from the original money invested.
"The point of my original post was that one should make a deliberate decision on whether to reinvest or not based on whether an asset is the best source of cash flow available to you. Thinking of money as the house's money (that's a gambling reference, if you aren't familiar with it) is not helpful in that mindset."
I agree that what to do with incoming dividends is best seen as making a deliberate decision. That's what I do, make decisions as part of routine portfolio management. I've never considered incoming dividends as house money.
"I asked, in essence, if you throw the dividend away, is it as useful as reinvesting it in something that produces cash flow."
I could not discern the question. My answer is, of course not. I don't throw any dividends away. As I have described extensively elsewhere, I consider the disposition of dividends to be as important as the decisions I made when I first constructed the portfolio. If I am at this long enough, I will make decsions about dividends that exceed the amount that I originally put in.
"My other point I tried to make to you is that money is fungible. If you are calling it "old money" when you invest it in the same stock that paid you the dividend in question (drip), but consider it a new investment when you invest it into a new company, then you are engaging in mental accounting."
I don't drip. I make every investment as the result of a deliberate decision. "New" in the context I used it was meant to mean that I might buy a stock that I have not owned before, so the stock is new to my portfolio. The money that I use to buy it with is not "new money," it is dividends produced by the portfolio.
"As for my final comment, "total returns aren't supposed to matter to DG investors", I'm not sure what you find so ridiculous."
What I found ridiculous was the generalization. I care about total returns, although my primary goal relates to income optimization. Some dividend growth investors specifically say that their primary goal is total returns. Josh Peters of Morningstar has that as his primary goal. The year-old dividend newsletter service from AAII has that as their primary goal.
"So, do you really have a problem with my original sentiment "Calling dividends inside money, or old money, or house money allows you to ignore whether you can allocate that money in a better way. If you feel that investing it in something that is not a bargain because it is more trouble than its worth to do otherwise, that could be a wise decision. But an investor should force himself/herself to make those conscious decisions or risk becoming complacent."
My problem is with your premise ("...allows you to ignore..."). I agree with your last sentence, although I would not have worded it that way. I have written many articles and comments in which I have discussed the importance of reinvestment decisions. Most of the DG investors that write here a lot have made very conscious decisions about what to do with incoming dividends. Some have chosen to drip them, for reasons that they have articulated. Some (such as myself) have chosen to accumulate them and then reinvest them in chunks, for reasons that we have articulated. Some investors do both, depending on the stock and the situation, for reasons they have articulated. I have not seen much complacency.
Dripping Works: A Real-World Example [View article]
Todd, I will admit that I do not understand much of your comment. I'll do the best I can with pieces of it.
"If you sold shares of your stock and reinvested them in a new company, would your yield on cost calculation use the new stock's price as a baseline, or the original shares' cost?"
That's really two questions. The new company would have its own new YOC calculation, beginning at the time I bought it. The portfolio, however, would have its YOC calculated in the usual fashion. The stock swap would not change the "cost" input for the portfolio as a whole.
"If you use the new stocks price as the baseline, how did the money magically become "new money"?"
I don't know what this means. Nothing magic happened anywhere.
"If you sold shares of your stock and invested half the proceeds in exotic dancers, and half the proceeds in CVX, would you consider both to be equally lucrative? If not, why shouldn't the quality of free cash flow or dividend yield that you are purchasing with your "old money" matter, or does it only matter after selling the shares?"
I have no idea what you are talking about.
Finally, your comment about "total returns aren't supposed to matter to DG investors" is ridiculous.
Dripping Works: A Real-World Example [View article]
I don't consider dividends "new money." My reasoning is that the dividends were produced by my original investment. It is true that they represent (previously unavailable) cash in the account, but I could also create (previously unavailable) cash in the account by selling shares for cash. I don't think anyone would argue that second source of cash was new money. So I don't consider dividends to be new money. Dave
Dripping Works: A Real-World Example [View article]
And now for something completely different. I don't have position sizes, not deliberate ones anyway.
When I started my dividend growth investing, I bought approximately equal position sizes. But since I accumulate or pool my incoming dividends and target just a few well valued stocks, the growth in those positions, or in new positions, has been quite uneven since then. I accumulate up to $1000, then invest that. If I add that to an existing position, then that position becomes a little bigger. If I use it to buy a new stock, that position is probably, for a while, the smallest position that I own.
I don't have "core" holdings either. I just have positions. I do have maximum size limits, and I am trying to diversify into more positions, so those two considerations could cause me to sell and redeploy, or to favor a new stock over one that I already own.
This may sound pretty unmanaged, but it is not random: Each purchase is made for a reason that is sound and that I think will improve my portfolio in some way. I think of it more as a process of natural selection.
My 5 Points For Managing My Retirement Investing Behavior [View article]
>>"fair value is not static"<<
That's a great point. Fair values (whatever the method) are computed on data that is ever-changing. The data changes particularly fast when companies announce quarterly results and offer guidance for the future.
My 5 Points For Managing My Retirement Investing Behavior [View article]
While the applications of concepts to stock investing are indirect, I'd recommend Nate Silver's The Signal and the Noise. He's the guy that correctly predicted the outcome in all 50 states in the last election. If you like to look at the world probabilistically (as I do) rather than as on-off or black-white, it's a good read. Not too heavy on statistics, it was written for laymen. I learned a lot about weather forecasting too, including why local forecasters tend to overpredict the chance of rain in your area, while national forecasters actually are more accurate for your area. Hint: It's not becasue they have better equipment or more data. It's psychological. Dave
My 5 Points For Managing My Retirement Investing Behavior [View article]
I like hwood's comment and Eddie's response, analogizing the training of running toward "trouble" as being a better investing response than running away from it. The latter kind of separates the long-term investor from the short term.
It reminds me of the comment exchange I once had with LW (most of you know who I mean). First off, it took him a while to understand that we were talking about individual stocks, not ETFs (duh). Then, when he figured that out, he demanded to know what I sold in 2008. It was a gotcha question, because he thought he had me cornered and I'd be forced to admit that I panic-sold all over the place and ran away in fear. Unfortunately for him, 2008 was when I STARTED as a dividend growth investor. I was buying all over the place. I tried to explain that, but I think he just thought I was lying.
The Business Model Of The Dividend Growth Investor [View article]
>>"It's your opinion and nothing else."<<
Actually, I'll buy that statement, Cross. You're right: My stock selections are my opinion. No one can know the future, so how they play out cannot be read from their history. We will only know how they play out over time going forward.
But saying it's only my opinion glides right past an important consideration: Whether my opinion is informed or not. We all know that some opinions are nothing more than knee-jerk reactions, or "religious" beliefs with nothing but faith to back them up. At the other end of the scale, we get opinions that are based on facts, reasonable inferences from those facts, and track records that (while no guarantee) suggest that future performance might resemble past performance on important metrics.
When you are speaking to people like chowder, Bob Wells, David Fish, David Crosetti, Dividends4Life, Dividend Growth Investor, Five Plus Investor, richjoy, Chuck Carnevale, myself, and many others, you are dealing with opinions formed in the latter fashion. We have all not only done extensive research, but we have shared it with each other, enriching everyone's body of knowledge and the foundation for our opinions.
When you state that most of the stocks we own are in the SP500, what is your point? We have stated repeatedly that we are selecting what we feel - based on track records, facts, and reasonable inferences - are the best stocks to construct portfolios that will over time meet our own goals. The fact that the stocks we select are in the SP500 or any other index is irrelevant. We claim no exclusivity. We do believe that we have selected the best stocks to meet our goals.
Most of us have explicitly laid out those goals, and many of us have written extensively about how we select and monitor those portfolios. Your list of stocks that were at one time popular (with whom?) that have since failed is true but irrelevant. If you think it is relevant, please explain how. We all know about those examples, and many of us have learned what we can from them and moved on. Beyond that, what's the relevant point?
Your statements about chowder's not wanting to know his results are absurd. Have you not read his detailed tracking pieces? Or mine? Or Bob's? Or Crosetti's? Perhaps you formed your opinion first, without actually informing yourself prior to stating your opinion. Then that would place your opinion into the "uninformed" category.
I'd like to suggest that you go back and reread what you have written. Try to see it through the eyes of people who have different goals from yours; have carefully researched what they invest in; are methodical and constantly making adjustments based on facts; and who have written up what they do so it can be reviewed by their peers. Perhaps if you do that, you will gain some insight into the relative indifference most of us have to comparing our performance to the SP500. At any rate, your opinion of what we do will be better informed.
My 5 Points For Managing My Retirement Investing Behavior [View article]
Eddie, Congratulations on an excellent article. A commenter on another thread today (who may show up here) might call your practices "irrational." But actually, they are ultra-rational, all pegged to your goals and within your circle of competence. Businesslike discipline is great for individual investors. Good job. Dave
Are Streaks And Current Yields The Best Metrics For Dividend Growth Investors? [View article]
D, you crack me up. You haven't posted a bio, so I have no idea what your investing principles are. But let's just say that one of your investing goals was to earn income from equities. Are you saying that looking at stocks with dividends > 0 would be irrational? Dave
Dripping Works: A Real-World Example [View article]
m, Perhaps an explanation is in order. Your comment about being down because of a price drop suggests that you are looking at total return. Yes, you are correct that he is down in total return(assuming your math is right, I didn't check).
But he is not down in dividend income. He up in that element of total return. Now you might think this is a silly way to look at stock returns, but many investors in this section (called "Dividends & Income") separate out the price component from the income component. That's because many of us are looking to optimize income from equities over long periods of time.
For many of us, the end game is to accumulate such a stream of dividends that we can live off the stream in retirement, without having to sell assets to meet our expenses. For that reason, we accept short term price fluctuations in the market. What we guard against are things that threaten the dividend stream.
Are Streaks And Current Yields The Best Metrics For Dividend Growth Investors? [View article]
Craig,
In my demonstration Dividend Growth Portfolio (real money, the monthly report card is on my website), annual dividend growth is well over 10%.
That is not because new money is being invested (no new money goes into the portfolio), but rather is the combined result of (1) company dividend increases, plus (2) reinvestment of dividends. (I do not equate reinvestment with DRIP; I accumulate dividends and reinvest them in $1000 chunks).)
If you are going to look into dividend growth rates, you need to distinguish (in my opinion) at least three scenarios: --No new money and dividends not reinvested (as might be the case for a retiree) --No new money but dividends reinvested (as in the case of my DGP) --New money coming into portfolio from + dividends reinvested (as would commonly be the case with a younger person who is accumulating).
On overlooking opportunities, I am not sure that I made myself clear above. I am willing to miss an occasional opportunity in return for having a set of starting standards that I think make sense for my overall goal. I'm thinking this would be the case no matter what standards you set up.
For example, you said you'd like to see a universe of dividend growth stocks that are not screened by length of streak but by dividend growth rate. Any rate you choose would exclude some stocks (that's why you do it). Well, your chosen cutoff will de-select some stocks that fail your required minimum DGR, but which may, over long periods, fit your goals to a T. That's because the DGR is backward-looking, while your investing will be forward.
Another related point: If you are going to be at this for many years, you get a new chance every year (or every month if you want) to redefine your standards and/or for formerly deselected companies to newly meet your requirements. All of the companies that cut their dividends in 2008-2009 are not in my starting universe, because I use a 5-year streak requirement. But some of them may start appearing in my universe as early as next year, if they've raised their dividend every year 2009-2013. So it's not like they are forever banned, they just have to perform in a way that satisfies my minimum requirement.
The same would be true of a required minimum DGR, required minimum yield, etc. Any standard you set is going to disqualify some stocks. Indeed, that's why you do it, to get started on your journey to find the best stocks that YOU want to invest in.
Kimberly Clark: An Underrated Teacher For Dividend Investors [View article]
Robert,
Pen and Miz are right. It's straightforward math. $dividend = $earnings x payout ratio%. The dividend can increase more slowly, even when payout ratio rises, because the dividend is a function of two variables, not just one (the payout ratio).
In fact, you will see this fairly commonly when companies have "down" years in earnings. They stretch to raise the dividend at all, given slowing earnings growth or even an earnings decline. In fact I like to see this, as it helps give me confidence that the company is committed to raising its dividend each year.
Of course, growing dividends (via expanding the payout ratio) despite slowing or declining earnings is not sustainable for years in a row. See PBI. but it's fine when a company hits a rough patch for a year or two.
Dripping Works: A Real-World Example [View article]
I am not sure this is a productive conversation. To me you are making premises and assumptions and generalizations that render your questions and comments shaky. I will try to keep my answers short and direct and just have them pertain to me. Whatever generalizations you want to draw about DG investing is up to you.
"First, in your original reply to my post, you chose to play semantics regarding "new money"."
It's not semantics to me. New money is money coming in from outside. Money produced by the investment itself is not new money. That's the reason my demonstration Dividend Growth Portfolio is a "pure" demonstration: Its results come solely from the original money invested.
"The point of my original post was that one should make a deliberate decision on whether to reinvest or not based on whether an asset is the best source of cash flow available to you. Thinking of money as the house's money (that's a gambling reference, if you aren't familiar with it) is not helpful in that mindset."
I agree that what to do with incoming dividends is best seen as making a deliberate decision. That's what I do, make decisions as part of routine portfolio management. I've never considered incoming dividends as house money.
"I asked, in essence, if you throw the dividend away, is it as useful as reinvesting it in something that produces cash flow."
I could not discern the question. My answer is, of course not. I don't throw any dividends away. As I have described extensively elsewhere, I consider the disposition of dividends to be as important as the decisions I made when I first constructed the portfolio. If I am at this long enough, I will make decsions about dividends that exceed the amount that I originally put in.
"My other point I tried to make to you is that money is fungible. If you are calling it "old money" when you invest it in the same stock that paid you the dividend in question (drip), but consider it a new investment when you invest it into a new company, then you are engaging in mental accounting."
I don't drip. I make every investment as the result of a deliberate decision. "New" in the context I used it was meant to mean that I might buy a stock that I have not owned before, so the stock is new to my portfolio. The money that I use to buy it with is not "new money," it is dividends produced by the portfolio.
"As for my final comment, "total returns aren't supposed to matter to DG investors", I'm not sure what you find so ridiculous."
What I found ridiculous was the generalization. I care about total returns, although my primary goal relates to income optimization. Some dividend growth investors specifically say that their primary goal is total returns. Josh Peters of Morningstar has that as his primary goal. The year-old dividend newsletter service from AAII has that as their primary goal.
"So, do you really have a problem with my original sentiment
"Calling dividends inside money, or old money, or house money allows you to ignore whether you can allocate that money in a better way. If you feel that investing it in something that is not a bargain because it is more trouble than its worth to do otherwise, that could be a wise decision. But an investor should force himself/herself to make those conscious decisions or risk becoming complacent."
My problem is with your premise ("...allows you to ignore..."). I agree with your last sentence, although I would not have worded it that way. I have written many articles and comments in which I have discussed the importance of reinvestment decisions. Most of the DG investors that write here a lot have made very conscious decisions about what to do with incoming dividends. Some have chosen to drip them, for reasons that they have articulated. Some (such as myself) have chosen to accumulate them and then reinvest them in chunks, for reasons that we have articulated. Some investors do both, depending on the stock and the situation, for reasons they have articulated. I have not seen much complacency.
Dave
Dripping Works: A Real-World Example [View article]
"If you sold shares of your stock and reinvested them in a new company, would your yield on cost calculation use the new stock's price as a baseline, or the original shares' cost?"
That's really two questions. The new company would have its own new YOC calculation, beginning at the time I bought it. The portfolio, however, would have its YOC calculated in the usual fashion. The stock swap would not change the "cost" input for the portfolio as a whole.
"If you use the new stocks price as the baseline, how did the money magically become "new money"?"
I don't know what this means. Nothing magic happened anywhere.
"If you sold shares of your stock and invested half the proceeds in exotic dancers, and half the proceeds in CVX, would you consider both to be equally lucrative? If not, why shouldn't the quality of free cash flow or dividend yield that you are purchasing with your "old money" matter, or does it only matter after selling the shares?"
I have no idea what you are talking about.
Finally, your comment about "total returns aren't supposed to matter to DG investors" is ridiculous.
Dave
Dripping Works: A Real-World Example [View article]
Dave
Dripping Works: A Real-World Example [View article]
When I started my dividend growth investing, I bought approximately equal position sizes. But since I accumulate or pool my incoming dividends and target just a few well valued stocks, the growth in those positions, or in new positions, has been quite uneven since then. I accumulate up to $1000, then invest that. If I add that to an existing position, then that position becomes a little bigger. If I use it to buy a new stock, that position is probably, for a while, the smallest position that I own.
I don't have "core" holdings either. I just have positions. I do have maximum size limits, and I am trying to diversify into more positions, so those two considerations could cause me to sell and redeploy, or to favor a new stock over one that I already own.
This may sound pretty unmanaged, but it is not random: Each purchase is made for a reason that is sound and that I think will improve my portfolio in some way. I think of it more as a process of natural selection.
Dave
6 Lessons Learned From Up And Down Markets [View article]
Dave
My 5 Points For Managing My Retirement Investing Behavior [View article]
That's a great point. Fair values (whatever the method) are computed on data that is ever-changing. The data changes particularly fast when companies announce quarterly results and offer guidance for the future.
My 5 Points For Managing My Retirement Investing Behavior [View article]
Dave
My 5 Points For Managing My Retirement Investing Behavior [View article]
It reminds me of the comment exchange I once had with LW (most of you know who I mean). First off, it took him a while to understand that we were talking about individual stocks, not ETFs (duh). Then, when he figured that out, he demanded to know what I sold in 2008. It was a gotcha question, because he thought he had me cornered and I'd be forced to admit that I panic-sold all over the place and ran away in fear. Unfortunately for him, 2008 was when I STARTED as a dividend growth investor. I was buying all over the place. I tried to explain that, but I think he just thought I was lying.
Dave
The Business Model Of The Dividend Growth Investor [View article]
Actually, I'll buy that statement, Cross. You're right: My stock selections are my opinion. No one can know the future, so how they play out cannot be read from their history. We will only know how they play out over time going forward.
But saying it's only my opinion glides right past an important consideration: Whether my opinion is informed or not. We all know that some opinions are nothing more than knee-jerk reactions, or "religious" beliefs with nothing but faith to back them up. At the other end of the scale, we get opinions that are based on facts, reasonable inferences from those facts, and track records that (while no guarantee) suggest that future performance might resemble past performance on important metrics.
When you are speaking to people like chowder, Bob Wells, David Fish, David Crosetti, Dividends4Life, Dividend Growth Investor, Five Plus Investor, richjoy, Chuck Carnevale, myself, and many others, you are dealing with opinions formed in the latter fashion. We have all not only done extensive research, but we have shared it with each other, enriching everyone's body of knowledge and the foundation for our opinions.
When you state that most of the stocks we own are in the SP500, what is your point? We have stated repeatedly that we are selecting what we feel - based on track records, facts, and reasonable inferences - are the best stocks to construct portfolios that will over time meet our own goals. The fact that the stocks we select are in the SP500 or any other index is irrelevant. We claim no exclusivity. We do believe that we have selected the best stocks to meet our goals.
Most of us have explicitly laid out those goals, and many of us have written extensively about how we select and monitor those portfolios. Your list of stocks that were at one time popular (with whom?) that have since failed is true but irrelevant. If you think it is relevant, please explain how. We all know about those examples, and many of us have learned what we can from them and moved on. Beyond that, what's the relevant point?
Your statements about chowder's not wanting to know his results are absurd. Have you not read his detailed tracking pieces? Or mine? Or Bob's? Or Crosetti's? Perhaps you formed your opinion first, without actually informing yourself prior to stating your opinion. Then that would place your opinion into the "uninformed" category.
I'd like to suggest that you go back and reread what you have written. Try to see it through the eyes of people who have different goals from yours; have carefully researched what they invest in; are methodical and constantly making adjustments based on facts; and who have written up what they do so it can be reviewed by their peers. Perhaps if you do that, you will gain some insight into the relative indifference most of us have to comparing our performance to the SP500. At any rate, your opinion of what we do will be better informed.
Dave
Dripping Works: A Real-World Example [View article]
Dave
My 5 Points For Managing My Retirement Investing Behavior [View article]
Dave
Are Streaks And Current Yields The Best Metrics For Dividend Growth Investors? [View article]
Dave
Dripping Works: A Real-World Example [View article]
But he is not down in dividend income. He up in that element of total return. Now you might think this is a silly way to look at stock returns, but many investors in this section (called "Dividends & Income") separate out the price component from the income component. That's because many of us are looking to optimize income from equities over long periods of time.
For many of us, the end game is to accumulate such a stream of dividends that we can live off the stream in retirement, without having to sell assets to meet our expenses. For that reason, we accept short term price fluctuations in the market. What we guard against are things that threaten the dividend stream.
Dave
Are Streaks And Current Yields The Best Metrics For Dividend Growth Investors? [View article]
In my demonstration Dividend Growth Portfolio (real money, the monthly report card is on my website), annual dividend growth is well over 10%.
That is not because new money is being invested (no new money goes into the portfolio), but rather is the combined result of (1) company dividend increases, plus (2) reinvestment of dividends. (I do not equate reinvestment with DRIP; I accumulate dividends and reinvest them in $1000 chunks).)
If you are going to look into dividend growth rates, you need to distinguish (in my opinion) at least three scenarios:
--No new money and dividends not reinvested (as might be the case for a retiree)
--No new money but dividends reinvested (as in the case of my DGP)
--New money coming into portfolio from + dividends reinvested (as would commonly be the case with a younger person who is accumulating).
On overlooking opportunities, I am not sure that I made myself clear above. I am willing to miss an occasional opportunity in return for having a set of starting standards that I think make sense for my overall goal. I'm thinking this would be the case no matter what standards you set up.
For example, you said you'd like to see a universe of dividend growth stocks that are not screened by length of streak but by dividend growth rate. Any rate you choose would exclude some stocks (that's why you do it). Well, your chosen cutoff will de-select some stocks that fail your required minimum DGR, but which may, over long periods, fit your goals to a T. That's because the DGR is backward-looking, while your investing will be forward.
Another related point: If you are going to be at this for many years, you get a new chance every year (or every month if you want) to redefine your standards and/or for formerly deselected companies to newly meet your requirements. All of the companies that cut their dividends in 2008-2009 are not in my starting universe, because I use a 5-year streak requirement. But some of them may start appearing in my universe as early as next year, if they've raised their dividend every year 2009-2013. So it's not like they are forever banned, they just have to perform in a way that satisfies my minimum requirement.
The same would be true of a required minimum DGR, required minimum yield, etc. Any standard you set is going to disqualify some stocks. Indeed, that's why you do it, to get started on your journey to find the best stocks that YOU want to invest in.
Dave
Kimberly Clark: An Underrated Teacher For Dividend Investors [View article]
Pen and Miz are right. It's straightforward math. $dividend = $earnings x payout ratio%. The dividend can increase more slowly, even when payout ratio rises, because the dividend is a function of two variables, not just one (the payout ratio).
In fact, you will see this fairly commonly when companies have "down" years in earnings. They stretch to raise the dividend at all, given slowing earnings growth or even an earnings decline. In fact I like to see this, as it helps give me confidence that the company is committed to raising its dividend each year.
Of course, growing dividends (via expanding the payout ratio) despite slowing or declining earnings is not sustainable for years in a row. See PBI. but it's fine when a company hits a rough patch for a year or two.
Dave