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Geoff Considine

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  • Manufacturing Collapse Reminiscent of Great Depression's Beginning [View article]
    Bring on the gloom and doom! The reason markets move so much is because investors swing from glee to despair. Obviously we are in the "despair" end of things now. Despair, like glee, feeds on itself. It is well known that economists outlooks are correlated to what has been happening recently. To give up on equities is to say that owning a business makes no sense--why bother--you'll just lose because the world is ending. Even if there is an extended severe recession, there are businesses that I will want to own. Investors who flee all equities because they believe a forecast are making just this decision. Investors own businesses. Speculators bet on forecasts.

    Jan 6 01:46 PM | 7 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 [View article]
    Hi Mostserene1:

    The general bias against dividend-oriented investing has a lot to do with the current standards, training, and regulations. The curriculums for becoming an advisor or CFP etc. all emphasize total return--this goes back to the 50's and the Modigliani-Miller dividend irrelevance hypothesis. Very influential in academic finance. It takes decades for new theory to get into practice and while recent research clearly suggests that dividends and price gains are different, there is an old-school framework that starts with perfect market efficiency and ignores all of behavioral finance and a range of more recent studies. This old-school approach is taught to every CFP and advisor. Oddly, if you go back before the efficient market stuff took over, there was a big emphasis on dividends then.

    Just my thoughts here...
    Jan 2 10:32 AM | 5 Likes Like |Link to Comment
  • Dividend Aristocrats Will Continue to Outperform [View article]
    Alan:

    Trust me--I am well aware that -18% is not a happy outcome. For the people who are net short or who have otherwise sustained no losses in the last couple of years, I am duly impressed. For the institutional investors and retail investors who maintain net long positions, relative out-performance matters a great deal. The Dividend Aristocrats have turned a REALLY bad year into far less substantially bad year. You seem to be suggesting that the only good strategy is one that never has losses. If you believe that this is possible, I wish you luck.

    If price appreciation is anemic, I will be very grateful for the dividends for my net long positions.

    With regard to comments from donzelion and Whidbey:

    The theory etc. behind why companies pay dividends and why investors care is long and interesting. Dividends are a signal to investors. Some companies have tried to exploit this with leveraged dividend strategies or simply payouts that were simply too high to be sustained. Dividends that are raised or maintained over long periods can signal managements approach to growth, etc. Yes, companies can and do cut their dividends and they may do so in the future. Do you think that the out-performance of the Aristocrats in 2008 was just coincidence? Time will tell.

    Regards,

    Geoff
    Apr 27 06:26 PM | 5 Likes 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
  • Why Dividends Matter [View article]
    Hi Larry:

    I was not suggesting that you should agree with everything Bogle says, but rather that you have stated a number of times here that it is obvious and straightforward (basic math) that dividends don't matter. If Bogle disagrees, it would stand to reason that this is not obvious to Bogle who is obvious an intelligent and immensely experienced investor.

    Second, I don't understand your point about 'having it both ways.' This is a matter of estimation risk. Dividends are a very stable part of return with less estimation risk than any other. You cite DFA research showing this and there are other studies to the same effect.

    Also, over the long histories used to validate value as a factor, dividends were, on average, much higher. As companies' propensity to pay dividends has decreased, there is no guarantee that the value factor you believe in will continue to perform as well as it has in the past.

    Dividends are very important as a measure of earnings quality--true look-ahead estimates. You seem to not be distinguishing between looking backwards to explain returns and looking forwards. The standard factor analysis model is totally backward looking. Its very useful, but it does not include estimation risk. Are you really willing to discount the Pastor and Stambaugh research out of hand? How about the research on dividends as a predictor of earnings quality? A body of research demonstrates that estimation risk matters.

    I am writing two more posts on some of the issues raised here, and I will include the relevant academic research.
    Jan 2 09:25 PM | 4 Likes Like |Link to Comment
  • A Triple Play Income Strategy [View article]
    Nice article. Your note that investing in the highest yield stocks is dangerous is reflected in Prof. Ken French's data too. On his website, you can download the historical performance of portfolios selected on the basis on dividend yield. His data, going back 100 years, shows that higher-dividend portfolio out-perform, but that the portfolios formed on the basis of the highest 10% of yields actually underperform those with lower dividends. This is simply because the stocks with the absolute maximum yields are often in distress but have yet to cut their dividends. It makes no sense to invest on the basis of yield and to ignore RISK.

    I have written a few articles about looking at yield vs. risk, though none at SA.
    Feb 23 02:59 PM | 4 Likes Like |Link to Comment
  • Will High Dividend Stocks Help You Retire Comfortably? [View article]
    Hi Notbob:

    The 4% rule has been explored in many studies--I believe that the first was by Bengen. Since then, people have looked at this from a wide variety of angles. I do think that the 4% rule is relevant even to income investors, and that was sort of the point of my article for Advisor Perspectives.

    If you can be certain that you will never need to draw more from your portfolio than the income that it generates, you don't need to worry about any planning rule of course. This would mean that you are fine with your income being somewhat variable--and this is a new risk factor. Actually, any type of flexibility that you have to make 'mid course adjustments' in your income allows you to have more confidence in being able to fund the long-term income that retirement requires.

    What I have been looking at is accounting for the risk and return of an income oriented portfolio using Monte Carlo. These simulations treat all asset classes as though they have a consistent risk-return relationship. This approach implies that you cannot treat dividends as though they are somehow risk free--they can be cut, especially when you are talking about decade plus time scales.

    The ability to vary your income draw, either because you are liimiting your income draw to generated income from the portfolio or using 'mid course' adjustments to reduce your draw after a period of market declines, has a powerful benefit. That means, however, that you need to be able to cut your income draws as required when the time comes. Can people do this? This is an important question that can, in fact, be dealt with (in principle) using real options theory. In practice, if you have the ability to reduce your annual income by some amount, as your portfolio dictates, you will increase longevity.

    FYI, here is a nice essay by Bengen:

    spwfe.fpanet.org:10005...

    Obviously, what we assume about future risks and returns for various asset classes is a big driver and results differ, depending on what you use for the historical period or, if you are using Monte Carlo, what you assume for the equity risk premium.
    Nov 23 05:52 PM | 4 Likes Like |Link to Comment
  • Risk Management, Or Risk Manipulation [View article]
    Sir:

    Your perspective is a common one--and Nassim Taleb has been banging this drum for quite some time. There are two questions that need asking:

    1) Do the models work if used correctly?
    2) Do people have an incentive to misuse the models?

    Your answer to both appear to be no--but you provide no evidence that actually refutes (1). Certainly, we know that many firms have used risk management to obsure risks--to their own benefit. But there is a severe logical flaw in then assuming that you have addressed #1.

    When we have people like David Swensen and Ray Dalio who have consistently made money over decades relying on good quantitative portfolio management (although both took their lumps in 2008), we would be fairly foolish to ignore these guys and simply jump on the bandwagon that risks are not quantifiable and that portfolio analysis is worthless.

    Frankly, I will throw in my lot with Dalio and Swensen over Taleb any day of the week.
    Jan 30 12:51 PM | 4 Likes 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 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
  • Will High Dividend Stocks Help You Retire Comfortably? [View article]
    Hi all:

    Thanks for the lively discussion. You guys are wrangling with an issue that truly deserves more attention than it gets. I cited a Vanguard study based on history in my article in Advisor Perspectives that says that a total return approach is a clear winner over an income-oriented approach. My analysis takes a
    Monte Carlo approach and finds that there is not inherent reason that an income approach is inferior.

    The Monte Carlo approach has its limitations--it is based on a series of assumptions--as is any model. That said, I have done an enormous amount of work in testing and validating this model and it has held up quite nicely. The model results strongly favor Dividend Aristocrats--I've written about this at SA in the past.

    From a Monte Carlo / theory standpoint, total risk and total return go hand in hand. There is a large literature that supports this notion. By combining assets with low correlation, we can get more total return per unit of risk. All fine.

    My paper suggests that a portfolio with a high yield is not necessarily better at funding a long term income than a portfolio with a low yield if they both have the same expected total return. Further, in my SA post above, I take the additional step of asserting that you cannot plan on a higher draw / lower savings rate just because you have a higher yield portfolio. Neither of these things detracts from my being in favor of income oriented investing, however.

    A number of posters assert that a portfolio with higher yield is somehow safer than a portfolio with low yield and that this lower risk means that you can save less / draw more. I might tend to agree on a qualitative basis, but I am unaware of any research that demonstrates that this is the case over an extended period of history. This is our dilemma.

    We can argue over our belief in lower risk for dividend-paying stocks, for example, but my result accounts for this effect to the extent that lower risk is actually reflected in real market volatility and implied volatility. I have always espoused looking at options prices and their implied volatility as the measure of risk and and a wide range of research supports this approach.

    As I said in my article, there are behavioral factors that will tend to make dividend stocks attractive in ways that are not captured by the Monte Carlo, but I am not going to save less in the hope that these hard-to-estimate advantages are correct. I am still a dividend investor---I just don't think that it is a good idea to believe that we can save less because we are dividend investors.

    I will try to run Rihanni's alternative portfolio and post my results...

    Regards,

    Geoff
    Nov 27 01:15 PM | 3 Likes Like |Link to Comment
  • Will High Dividend Stocks Help You Retire Comfortably? [View article]
    Graham and Dodd Investor:

    Thanks for your comment. If you read my article in Advisor Perspectives, I think that you will see that I agree with you in general. My one concern about assuming that dividend payers will have smoother returns and thereby reduce the necessary savings rate is that the smoother returns are reflected in lower volatility already. Also, it is likely that the higher predictability means that the expected return will be a bit lower, because you are taking on less risk. This factor is accounted for in my analysis. That said, there are some interesting behavioral issues that make dividend investing quite attractive--including to me. I am becoming more convinced of the value of dividends as a way to avoid things like 'earnings management' and the unfortunate ways that many firms handle their stock buybacks.

    This is an area that deserves a lot more research--and its something that I am spending a lot of time on myself.

    Rhianni32:

    Your point with regard to the portfolio makeup is fair and reasonable. There are many ways to define an 'income portfolio' and I presented just one interpretation. Are you suggesting that you cannot build a reasonable income portfolio out of ETFs? Or, conversely, what would you consider to be a better representation of a high yield portfolio of ETFs?
    Nov 23 02:31 PM | 3 Likes Like |Link to Comment
  • Tactical Asset Allocation, Part I [View article]
    To phdinsuntanning:

    If you can time the direction of the market well enough to consistently be short when the market is going down (and vice versa), you don't need to worry about things like SAA, TAA, or risk management--you will make such large returns that you will own a large investment bank in no time at all. My writing is for those of us who lack your powers.
    Sep 30 01:50 PM | 3 Likes Like |Link to Comment
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