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Geoff Considine

 
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  • Debunking The 'Dividends Don't Add Shareholder Value' Myth [View article]
    Where, oh where is Larry Swedroe?
    Mar 14 11:35 AM | 2 Likes Like |Link to Comment
  • Why Dividends Matter: A Review Of Recent Research [View article]
    Larry:

    Adding Treasury bonds to a stock portfolio lowers the Beta but also lowers the exposure to the value factor--e.g. reduces the value tilt. The factor analysis performed by Alex Bryan shows that you get lower Beta and the same value tilt as for the high E/P portfolio before you ever add bonds.

    Of course adding bonds increases risk-adjusted return--that's fundamental in terms of diversification benefits--but this does not really address the issue of dividend stocks vs. other value strategies.

    Geoff
    Mar 4 03:22 PM | 1 Like Like |Link to Comment
  • Why Dividends Matter: A Review Of Recent Research [View article]
    Larry:

    You have mentioned this theme previously:

    "if you are getting low beta by buying high dividend stocks, that can be replicated by using high quality bonds in combination with value stocks to achieve the same beta for the portfolio"

    I actually wanted to mention this in my article, but I figured that you would be better at articulating your argument.

    Please share your research on this theme. The question that needs to be addressed is whether the corporate bonds, by lowering the beta, would also lower the weighting on the value factor. In addition, once you make this a broader asset allocation question, the discussion shifts substantially. Low Beta research shows that low Beta equities out-perform, but it is a whole different argument to introduce other asset classes--especially fixed income. There are also interesting questions about the efficacy of the factor models for portfolios including bonds. If I run corporate bonds through the factor model, I bet that I will get low Beta and some loading on value because corporate bonds--but that does not mean that corporate bonds are 'value stocks'...its simply a matter of correlation.

    Please expand your argument from above...
    Mar 4 10:10 AM | 3 Likes Like |Link to Comment
  • Why Dividends Matter, Part 2 [View article]
    SDS:

    Your link to Arnott's 'Bonds: Why Bother' is a great addition to the discussion, but I think that most people will require some additional connection. Arnott's point is that the equity risk premium is not a foregone conclusion, nor do we have perfect information in predicting the equity risk premium *going forward*. Once again, this is why estimation risk is so important.
    Feb 6 02:27 PM | 1 Like Like |Link to Comment
  • Why Dividends Matter, Part 3 [View article]
    The types of investors who buy an asset are certainly an important factor. The people buying a young growth stock with a P/E of infinity or no earnings at all are buying a lottery ticket. The people who buy utility stocks are buying a steady stream of earnings. This has been studied in the literature on 'glamour' stocks--they get lots of media and get driven way up by the hype. Sometimes they justify the hype. People who go to Vegas in the hopes of coming home as winners are the same types of people who bet that they can get a good return from fast-moving stocks. This has also been studied in the academic literature.
    Jan 24 11:01 AM | 1 Like Like |Link to Comment
  • Why Dividends Matter, Part 3 [View article]
    Larry:

    When you say that screening for dividends reduces diversification with no benefit, I have to raise an important point. Your comment on diversification is the main critique that DFA raises in their paper "Global Dividend Paying Stocks: A Recent History" and you have cited this paper a number of times. There is a logical problem with this argument, however. The DFA study also shows that portfolios selected for dividends have the same annualized return and lower volatility than the total universe of all stocks. Better diversification in this total stock universe should result in higher risk-adjusted returns than an 'under-diversified' dividend portfolio. But DFA shows that this is not the case.

    So, obviously there are types of stocks and industries that have little or no representation in a dividend-focused portfolio, but we have to be careful about distinguishing between this and the purpose of diversification which is to increase risk-adjusted returns. The DFA study is showing that the added 'diversification' from non-dividend stocks have no quantitative diversification benefit. This is odd.
    Jan 20 01:15 PM | 3 Likes Like |Link to Comment
  • Why Dividends Matter, Part 3 [View article]
    Hi all:

    Interesting additions to the discussion. I sense that there are quite a few mathematically savvy people here. That makes for a more interesting discussion.

    A central theme is the problem of estimating the equity risk premium in the future. We all know the historical ERP but that does not really matter--what matters is the future ERP. When there are polls of what experts thing the ERP will be, they vary enormously because the components are so hard to predict. The dividend piece is the one that nobody argues about. It is even harder to make the case that we know what the value or size premium will be going forward.

    Here is a great paper sponsored by the CFA institute:

    http://cfa.is/1ax4kNx
    Jan 17 04:03 PM | Likes Like |Link to Comment
  • Why Dividends Matter, Part 2 [View article]
    Larry:

    I think that everyone understands your points here--at least I hope so. You have reiterated them. At the same time, though you find in impossible to see, there are plenty of smart people (Bogle, Malkiel, etc.) who understand investing who continue to favor dividends for some or all of the reasons that I and others have articulated.

    I certainly appreciate your continued engagement here--it is good for everyone to have their conclusions challenged. We don't disagree on basic math--I don't think that this has ever been the question here, though I can see why you may have thought so.

    We continue to see the world differently on the main issue, which is whether dividends are a useful basis for selecting investments. I read the literature out there as saying that there are a wide range of reasons why dividend paying firms have higher quality earnings, less potential for agency issues, the low investor returns associated with buybacks, etc. and I continue to like dividends. The DFA study that you sent me shows that dividend payers, globally, have essentially identical CAGR with lower volatility than all stocks together or non-payers. This is, as you will note, perhaps entirely due to a value tilt associated with dividend payers. I am just fine with that. Finally, we have the issue of estimation risk, which is the topic of my part 3 of this post. I look forward to your comments.
    Jan 16 03:29 PM | 5 Likes Like |Link to Comment
  • Why Dividends Matter, Part 2 [View article]
    Larry:

    I am articulating in detail why I disagree with you on your argument that the fact that the four factor model explains most of the variance in return suggests that dividends are irrelevant in Part 3 of this post.

    I bring up Malkiel for the same reason I brought up Bogle's support for dividend-based investing. Many of your comments suggest that any mathematically literate person has to agree with you. Malkiel is clearly a world expert. This does not mean that you have to agree with him, but certainly you will concede that there are well-reasoned people on the other side of this issue from your position.
    Jan 14 02:14 PM | 2 Likes Like |Link to Comment
  • Why Dividends Matter, Part 2 [View article]
    FYI, Burton Malkiel reiterates his position that dividend-paying stocks are a good "anchor" for a portfolio:

    http://on.wsj.com/1dNt1Tc
    Jan 14 12:49 PM | Likes Like |Link to Comment
  • Why Dividends Matter, Part 2 [View article]
    Larry:

    I'd love to read the DFA paper you link to, but it is behind DFA's firewall. Could you send it to me...its hard to judge a paper that you have not been able to read.

    From your summary, however, I would prefer dividend payers. Same CAGR and lower volatility--that sounds like an argument in favor of dividend payers. With the same CAGR and lower vol, this would also be much more attractive to people who need income.

    Geoff <dot> considine yahoo <dot> com

    Thanks,

    Geoff
    Jan 12 08:06 PM | 1 Like Like |Link to Comment
  • Why Dividends Matter, Part 2 [View article]
    Larry:

    Can you articulate what you mean by "nice try but it doesn't explain the outcomes correctly"? What "it"--what "outcomes."

    You also said that I was "clearly wrong" about the number of shares issues--I don't know what you are referring to.

    I appreciated your spirited defense of your position--even though I don't agree.
    Jan 10 03:28 PM | 2 Likes Like |Link to Comment
  • Why Dividends Matter, Part 2 [View article]
    The article / analysis from Vanguard that Larry suggests as making the case for total return is an interesting choice because I wrote an lengthy piece when that came out in which I critique the thinking:

    http://bit.ly/1cKGVru
    Jan 10 12:26 PM | 1 Like Like |Link to Comment
  • Why Dividends Matter, Part 2 [View article]
    Matt and Larry:

    You guys are focusing on a key issue here and this was one of the key reasons that I wrote this post. For investors to be indifferent with regard to a dividend vs. reinvestment vs. buybacks, you have to make some assumptions about the rate of return on reinvested earnings and buybacks. There is a body of research in behavioral finance that shows that managers may not behave in the best interests of shareholders when making the decisions about how to invest retained earnings.

    The 'simple math' issue that Larry keeps going back to is that the cash value of your portfolio does not change when a company pays a dividend. If a company has $3 in cash per share and pays that as a dividend, this does not change the financial value of your position relative to what it was before the dividend is paid. The nature of what you own is different, though, as I have tried to explain.
    Jan 9 04:08 PM | 4 Likes Like |Link to Comment
  • Why Dividends Matter, Part 2 [View article]
    David C:

    I actually think that companies will change their propensity to pay dividends if investors signal that this is important to them. There is a whole literature on this--the topic is the 'catering theory' for why companies pay dividends. The idea is that companies pay dividends if investors signal that they want dividends.

    The shift in the propensity to pay dividends is, I believe, directly related to the fact that the majority of investors have been trained not to look for dividends as an important signal. If investors are indifferent--they have been trained to care only about total return--then why pay them? It is much easier for companies not to have this commitment to generating consistent earnings.
    Jan 7 12:06 PM | 4 Likes Like |Link to Comment
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