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DG Ruralist

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  • Young Incomers Portfolio: Q1 2014 Update [View article]
    Young,

    Fabulous start and I commend you for your goal-setting. I have similar dividend-growth goals as you. We are well on our way.

    I think KO was an excellent addition to your portfolio. Regarding diversification, don't worry about the nay-sayers: your portfolio will become diversified as you continue your monthly contributions into new companies.

    From your last article, I saw that you have a yield requirement of 3.5%. When I started DGI, I had a similar high requirement, but since then, I've changed my viewpoint and sort of thrown it out. I've began to focus more on finding companies that exhibit past, present, and future dividend growth prospects: especially regarding the stocks in my IRA's. Since I've got 3 decades before I can withdrawal anything, it makes more sense in my mind to focus on growth at a reasonable price. So don't be afraid to consider those types of companies as well. A few examples in my book are ABT, SYK, UNP, GWW, BA, QCOM, IBM, VFC, PII, MA. I don't own them all, but I'd like to at the right price. In 30 yrs, the income produced should be awesome.

    I do have a question regarding your DGP: is it a taxable account or IRA or some combination thereof? If so, does your "retire early" goal account for some of your assets being stuck in your IRA's until 59.5? I just know it's hard to retire early (40-50 yrs old) when all your assets are in your IRA.

    Ruralist
    Mar 27 10:00 AM | 2 Likes Like |Link to Comment
  • Total Return Is Not All That Matters In The Accumulation Phase [View article]
    Dale,

    It sounded like your $1M vs $1.5M comparison was an ad slogan. Even though the dollars and the investment approach aren't necessarily related at all, it's still catchy. Is there an ad term for that? Some sort of positive association technique.

    It's sort of like seeing everyone so happy and giddy in those Viagra commercials. It must be correlative, right?
    Mar 21 12:31 PM | Likes Like |Link to Comment
  • Total Return Is Not All That Matters In The Accumulation Phase [View article]
    Mr. Roberts,

    "Certainly in the accumulation stage the most important metric is total return. Investors would rather have $1.5 million in retirement accounts compared to $1 million. I don’t think anyone would argue with that."

    Well, I'm in the accumulation phase, and I don't know which I'd pick. Your two portfolios have many details that are needed to make a decision. What are the valuations of each? Asset types? Is it all in cash? For example, I would happily take $1 million in SPY at its current price vs $1.5 million in Amazon at its current price.

    Wouldn't you take the SPY over Amazon? Any any rate, be specific.

    Thanks,
    Ruralist
    Mar 21 08:55 AM | 2 Likes Like |Link to Comment
  • Dividends And 'The Magic Pants' [View article]
    Larry,

    Who said I reinvested into the same company?
    Mar 19 05:20 PM | Likes Like |Link to Comment
  • Dividends And 'The Magic Pants' [View article]
    streakmarine,

    Larry's example in his article talked nothing of growth. His example was taking a "shapshot in time", so to speak, as was my example. Neither of us were speaking in terms of "next year's" book value, earnings, etc.

    My whole point was trying to undermine his basic assumption of book value. Companies rarely trade in terms of book value anymore. Book value is the STATIC interpretation of viewing a company. It's a snapshot in time. It gives you nothing of the past or future.

    In today's day and age, we discuss how companies are valued as a function of their DYNAMIC view by some sort of cash flow (or earnings growth, or FFO, etc). Money comes into the company and is used in some form or another. This is the flow of money of a company and it can give some indication of the past and future.

    Therefore, it only makes sense to view dividends in light of a company's dynamism.

    Ruralist
    Mar 19 11:23 AM | 1 Like Like |Link to Comment
  • Dividends And 'The Magic Pants' [View article]
    Larry,

    The math changes when the assumptions change. I shall copy your example, while basing the stock price as a function of earnings. The assumption here is that book value is not considered, while only the earnings are.

    The two companies both earn $2 a share. Company A pays a $1 dividend, while Company B pays none. We will assume that both companies trade at the same P/E of 10 for a stock price of $20/share. An investor in A owns 10,000 shares and takes the $10,000 dividend to meet his spending requirements. The investor will have an asset allocation of $200,000 in stock ($20 x 10,000 shares) and $10,000 in cash for a total of $210,000.

    Now let's look at the investor in B. His asset allocation is $200,000 in stock and $0 in cash. He must sell shares to generate the $10,000 he needs to meet his spending needs. So he sells 500 shares and generates $10,000. With the sale, he now has just 9,500 shares. Those shares are $20, so his asset allocation is $190,000 in stock and $10,000 in cash, which is a total of $200,000.

    So yes, when you change the assumptions, you change the math. You book-value assumption is valid for companies that trade as a function of book value. For companies that trade as a function of earnings, then your statements don’t hold water.

    Ruralist
    Mar 19 10:04 AM | 1 Like Like |Link to Comment
  • Dividends And 'The Magic Pants' [View article]
    Positive return in 2008? Kudos to you sir.

    I received real dividends in 2008 and 2009, which I reinvested. Seems like both of our plans were working.

    But then you say I'm addressing the wrong problem. Which is that?
    Mar 19 08:53 AM | 1 Like Like |Link to Comment
  • Dividends And 'The Magic Pants' [View article]
    Varan,

    "The other side claims that it is 'beguiling' and 'dangerous' to think that selling shares to generate income from non-dividend generating portfolios is same as dividends, without an iota of credible evidence for such a characterization."

    So how would those self-dividends have compared against actual dividends in 2008-2009? I always thought selling low was a bad thing. Is that just a part of your methodology?
    Mar 18 04:29 PM | 2 Likes Like |Link to Comment
  • Dividends And 'The Magic Pants' [View article]
    ipaduser,

    "The book value would drop.
    Stock prices are known to be pretty random. "

    So stock prices aren't a function of book value ? Guess you'd better tell ole' Larry here....
    Mar 18 04:25 PM | Likes Like |Link to Comment
  • Dividends And 'The Magic Pants' [View article]
    Larry,

    Thanks for the reply. You said this:

    "Sorry but it has nothing whatsover to do with whether a company trades at book value or not."

    But your stock examples in #3 of your article specifically value your companies in terms of book value.

    A stock's price is either a function of its income statement or balance statement or both. If a stock is 100% a function of its balance statement, then your de-pants argument makes sense. But since we incorporate cash flows/earnings into most valuations, then your de-pants' arguments hold less water.

    Ruralist
    Mar 18 04:22 PM | 2 Likes Like |Link to Comment
  • Dividends And 'The Magic Pants' [View article]
    "What do you think happens to the first term on the right hand side if you start getting dividends?"

    That type of thinking makes sense to me if you're only talking about book value. And if a stock is priced 100% as a function of book value, then I could agree with you. But most stocks are priced as a function of earnings (or free cash flow, or FFO, etc) and earnings growth. Book value is of very little importance unless you're thinking the company is going to go bankrupt. At the very least, stock valuations are a function of both. And Larry's comments hold less water if you're valuing a stock in terms of earnings.

    Chuck has a few articles talking about how for-profit companies are valued as a function of earnings and earnings growth. If you haven't read them, I highly recommend them.

    Ruralist
    Mar 18 02:32 PM | Likes Like |Link to Comment
  • A Future Leader Of Global Food: WhiteWave Foods Company [View article]
    Thank you for the article. I'm always interested in learning about quality companies in the small-cap food-stuffs category. However, 30x next year's earnings are a bit rich in my book, even for a 20% earnings grower. But I will keep my eyes peeled for future price drops.

    Thanks,
    Ruralist
    Mar 18 02:14 PM | 1 Like Like |Link to Comment
  • Dividends And 'The Magic Pants' [View article]
    Varan,

    "The same crowd thinks that a tautology like "total returns=capital appreciation+dividends" is one of the greatest insights in the history of the theory of finance."

    Maybe I'm young and naive, but is that equation not true?

    Assuming the equation holds, shouldn't one at least consider requesting a dividend from the companies they partner with?
    Mar 18 01:57 PM | 1 Like Like |Link to Comment
  • Dividends And 'The Magic Pants' [View article]
    Larry,

    Your points #1 and #2 are completely opposed to one another. In #1, your valuation metrics are a function of earnings (P/E, earnings yield, etc). But then in point #2, you seem to think that companies are valued as a function of their book value. So which is it? You can't have it both ways. In reality, for most money-making c-corps, the valuation is a function of earnings.

    "To emphasize the point, consider Apple (AAPL), which ended 2013 with almost $160 billion in cash. If the company decided to pay out say $100 billion of its cash in a dividend, do you really believe that the stock would be worth the same price?"

    To emphasize my point, I do contend that Apple would have the same stock price (within a few months of paying that $100B dividend). (As an example, see the McGraw-Hill $MHFI special dividend at the end of 2012). Apple is a great example of a company wasting their retained earnings. How many years has that money just been sitting there collecting its 0.1% interest rate? Unfortunately, it's very common for companies not to utilize their retained earnings efficiently. And if the company cannot, then paying out a dividend is a great use. That's why Apple shareholders wanted their dividend, because they saw the company wasting the money.

    Your point #3 talks about "homemade" dividends vs actual dividends. There are several other benefits of actual dividends that you do not address. For myself, market risk is the principle reason why I prefer dividend-paying stocks. (the other is the trading costs and capital gains taxes of constantly buying and selling to get your "homemade" dividend) A "homemade" dividend includes the unreliable component of market risk. Taking a "homemade" dividend in 2008-2009 would have been highly inefficient in using one's nest egg. Actual dividends bypass the market, going straight from the company to my checking account. They are reliable and predictable. My plan is to use any "homemade" dividends as my backup, as that's what I consider being conservative.

    "It's just that they don't matter in the sense that they don't add any explanatory power to returns. In other words, you can use screens such as low prices to value metrics (such as p/b, p/e, p/cf, p/s) and profitability metrics (such as ROE, or ROA) and produce a more efficient portfolio..."

    Could you explain more of what you mean by "explanatory power of returns"? And how would you describe a more efficient portfolio? Because more than likely, each person's definition of an efficient portfolio if highly linked to their own investment goals. So we could each be efficient, but doing quite opposite things.

    Ruralist
    Mar 18 10:51 AM | 3 Likes Like |Link to Comment
  • Are VYM And SDY Good Dividend Growth Investments? [View article]
    jcgilbert83,

    Another consideration is taxes and fees. If you're speaking of an IRA, then you only have trading fees to deal with. If it's a taxable account, then the capital gains taxes associated with switching strategies may eat you alive.

    I like high quality dividend growth companies in my taxable account. The plan is to never sell these and just live off the income. I just hate paying taxes. Then my kids can get the stepped up cost basis at my death. This is a conservative assumption for me, as I can always sell if things don't work out. (I'm still in my 20's, so it's probably good to stay conservative at this stage).

    It's just harder for me to understand a total return strategy using a taxable account. If it's a good year for the total return person, then they must have capital gains to take right? Where will the money come from to pay for the capital gains taxes? Out of my ordinary income? I'd prefer not to.

    That leaves selling more securities. This would create even more capital gains taxes. This is what I call a "downward spiral." And what if the market is having a panic attack when you sell those shares? You can then imagine flushing your money down a toilet.

    Ruralist
    Mar 6 03:38 PM | 2 Likes Like |Link to Comment
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