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  • Why Dividends Matter [View article]
    David Crosseti wrote "Have Ned Davis reports been "peer reviewed?"
    I'm kind of curious as to what's in the portfolios of these academics who write these studies. How have their portfolios performed in light of their own academic studies?"

    Being a reviewer in some scientific (not finance) journals and curious investor I hope I can answer.

    I doubt that Ned Davis reports have been peer reviewed. I didn't see the original report (Hope somebody will send it to me) but I did see the results in 3rd parties publications. There is nothing to review - Ned Davis does not propose a new hypothesis or model and does not make any experiment. He just calculate composite numbers based on known data. This is just technical report and if calculations and input data are correct there is no point to reject the result.

    The responsibility of a reviewer is to find mistakes in manuscript or/and to point the authors on some information they do not aware or ignore or forget. Manuscript passes if there is no mistake/error and all previous knowledge is taking into account. The academic financial papers I have read usually outline state of art quite nicely and I found very few math mistakes. I cannot really judge their assumptions (as only amateur investor) but they seems me too naive and too unrealistic often. Also a lot of studies us ad hoc approach and limited datasets, so conclusions are not very trust-able.

    Some financial academics have open firms in financial service to explore their findings in real world. Some failed, some doing good.... There is intrinsic conflict: if you found place with golden eggs gooses - why do you want to disclose its location? if you point to the location - are these eggs really made from the gold, are gooses still there?

    SDS
    Jan 2, 2014. 12:47 PM | Likes Like |Link to Comment
  • Why Dividends Matter [View article]
    Larry Swedroe,

    Let me try 1 more time.
    Imagine you have 100$ and you need 10$/year for living in simple world without inflation, taxes, etc.... but with FDIC. You went to bank and banker gave you 2 choices:
    A) you can deposit 100$ in checking account and bank guarantees that you can take any money (not exceed 100$) from it.
    B) you can deposit 100$ in saving account and bank guarantees to pay 10% interest for you deposit forever.
    If you choose A) and withdraw 10$/year for living you will be in a poor house after 10 years.
    If you choose B) and withdraw 10$/year of interest, you can live forever.

    Please don't tell me that stock market has secular uptrend (see Japan), that capitalism is good (we are loosing economy war to China), that company can re-invest earnings better than I allocate dividends (yes they can have good positive NPV projects for some time but the variety of their projects is much more smaller than investment choices I have) and all this crap. Show me math101.

    Happy New year!

    SDS
    Jan 2, 2014. 11:46 AM | 2 Likes Like |Link to Comment
  • Why Dividends Matter [View article]
    Geoff,
    Thank you for good article.
    SDS
    Jan 2, 2014. 11:34 AM | Likes Like |Link to Comment
  • Is The End Of Dividend Investing Coming? [View article]
    Taxes and inflation are real killers and both factors are in hands of politicians. So IMO voters should express their preferences and pressure politicians hard.
    SDS
    Jan 2, 2014. 10:47 AM | 6 Likes Like |Link to Comment
  • Dividend Champions For January 2014 [View article]
    David,
    Thank you for update and new info. I recently wrote "David Fish reaches fantastic ability (~ 90%) to time dividend increases for DG stocks (see his numerous SA articles). I do not know any other financial forecast with even 80% correct rate for quite huge number of stocks (~ 500 in CCC list). " This is 1 more reason why CCC list is very important.
    SDS
    Jan 2, 2014. 12:31 AM | 20 Likes Like |Link to Comment
  • Diversification For Dividend Growth Investors (Dec 23,2011) [View instapost]
    Butterfly Seeker argues that statement "default is also about 4% for investor grade bonds and bond investors recover in average 40% of principal" is "extremely wrong and misleading statistic" and pointed to
    http://stanford.io/1a6...
    and
    http://bit.ly/Kjfhc2
    in comments to http://seekingalpha.co... .

    I made mistake, somehow 4% printed in my memory for bonds. I know bonds very badly and do not invest in any bond.

    SDS
    Jan 2, 2014. 12:04 AM | Likes Like |Link to Comment
  • My DGI Plan: How I Keep Investing Simple [View article]
    The Part-time Investor

    Of course stock market is famous for fluctuations of almost everything including annual probability of dividend reductions. So “Some years 8% may cut (2008). Some years only 1% may cut. “ is correct
    But I don’t understand “In my opinion by holding more stocks you protect yourself from those black swan years in which there are many more cuts then would be expected.” IMO you expose to good years and to bad years if you keep stock portfolio without timing.
    SDS
    Jan 1, 2014. 11:48 PM | Likes Like |Link to Comment
  • My DGI Plan: How I Keep Investing Simple [View article]
    Butterfly Seeker: You continue to state this extremely wrong and misleading statistic [default is about 4% for investor grade bonds].

    Thank you for the links. I made mistake, somehow 4% printed in my memory for bonds. I know bonds very badly and do not invest in any bond.


    Butterfly Seeker : “What PTI now rightfully states is that if you take 10,000 investors with 25 stocks the result will not be that all those investors have exactly 1 stock cut its dividend but that many will have none cut their dividend and some have two or even more cut their dividend.”
    I didn’t claim that all investors have the same luck. Only investors who have “bad” stocks are affected by cuts.

    Butterfly Seeker : “By increasing the number of stocks he will then reduce the probability of being among those that are hardest hit while "paying" for this with a reduced probability of have none of the stocks cut their dividend.”
    The probability of cut does NOT depend on number of stocks in anybody portfolio. If firm ABC reduced dividends all investors who have ABC stock are affected.
    SDS
    Jan 1, 2014. 11:47 PM | Likes Like |Link to Comment
  • Diversification For Dividend Growth Investors (Dec 23,2011) [View instapost]
    It becomes evident that some DG investors are too naive from conversation to recent good article http://bit.ly/1d9gA3T. So I re-post lightly truncated discussion.


    SDS : "At average probability ~ 4% (http://bit.ly/A3tOrH) a DGi with 25 stocks should expect in average 1 cut per year and another DGi with 100 stocks should expect 4 cuts per year in average (of course I ignore quality of companies). "

    PTI: "Very true, but with the lower number of stock the more likely that an outlier number of companies cutting their dividend will hurt you. With a portfolio of ten stocks there is a legitimate possibility that 3 (30%) of them could cut their dividend. With a portfolio of 100 stocks, it is extremely unlikely that 30 of them would, even though the percent is the same. I believe the "law of large numbers" (am I using this term correctly?) explains this possibility. The larger the number of samples (ie, stocks) the more likely you are to be close to the true average."

    SDS: FORMALLY YOU LOSS DOES NOT DEPEND ON NUMBER OF STOCKS IN YOUR PORTFOLIO.
    Let simplify situation and assume 4 % gross failure probability. Gross failure here means that a company unpredictable closes the doors and investor looses all money (kind of Black Swan event). If you have 50 equally weighted stocks (i.e., 2% of your whole money was invested in each firm) you face 2 gross failures per year and you loose 4% of invested capital. If you have 100 equally weighted stocks (i.e., 1% of your whole money was invested in each firm) you face 4 gross failures per year and you again loose 4% of invested capital. So, naïve diversification doesn’t help.
    In reality dividend cut and even dividend suspension happens without (at least sometime before) quit of business of the firm which reduces dividends. Observations show that stock prices drop 15-40% before cut announcement and 5-40% immediately after dividend cut announcement. In average total stock price reduction is about 60% (these numbers came from relatively small set of events, so statistics is pure). Again at 4% annual probability of dividends failure average loss for investor does not depend on number of stocks in the portfolio. Of course I assume that all firms are equally expose to any failure, that failures occur randomly (see also http://bit.ly/J0r2m2), and that dividend investor sells at cut (not always wise – see http://bit.ly/rrrjkX).
    It seems interesting that default is also about 4% for investor grade bonds and bond investors recover in average 40% of principal (i.e. loose the same 60% as dividend “buy and blindly hold” investors). Although I think this is coincidence it might be worth to use bond diversification principles to dividend investing.
    The tricks of diversification are
    a) to choose only companies with lowest failure probability (but I guess Mr. Market prices them accordingly);
    b) to play coherency factors (http://bit.ly/102frew) and here small investors might have some advance with micro and nano-caps which are not investable for Wall Street;
    c) to adjust invested capital to failure probability.
    Well a) and c) mean ability to forecast dividend cuts and we know that forecasts in finance are very bad (usually only 50% are correct which means that any coin is a good “forecaster”). Due to good (in my eyes) dividend culture David Fish reaches fantastic ability (~ 90%) to time dividend increases for DG stocks (see his numerous SA articles). I do not know any other financial forecast with even 80% correct rate for quite huge number of stocks (~ 500 in CCC list).
    Jan 1, 2014. 06:42 AM | Likes Like |Link to Comment
  • My DGI Plan: How I Keep Investing Simple [View article]
    SDS -- "At average probability ~ 4% (http://bit.ly/A3tOrH) a DGi with 25 stocks should expect in average 1 cut per year and another DGi with 100 stocks should expect 4 cuts per year in average (of course I ignore quality of companies). "
    PTI: "Very true, but with the lower number of stock the more likely that an outlier number of companies cutting their dividend will hurt you. With a portfolio of ten stocks there is a legitimate possibility that 3 (30%) of them could cut their dividend. With a portfolio of 100 stocks, it is extremely unlikely that 30 of them would, even though the percent is the same. I believe the "law of large numbers" (am I using this term correctly?) explains this possibility. The larger the number of samples (ie, stocks) the more likely you are to be close to the true average."
    FORMALLY YOU LOSS DOES NOT DEPEND ON NUMBER OF STOCKS IN YOUR PORTFOLIO.
    Let simplify situation and assume 4 % gross failure probability. Gross failure here means that a company unpredictable closes the doors and investor looses all money (kind of Black Swan event). If you have 50 equally weighted stocks (i.e., 2% of your whole money was invested in each firm) you face 2 gross failures per year and you loose 4% of invested capital. If you have 100 equally weighted stocks (i.e., 1% of your whole money was invested in each firm) you face 4 gross failures per year and you again loose 4% of invested capital. So, naïve diversification doesn’t help.
    In reality dividend cut and even dividend suspension happens without (at least sometime before) quit of business of the firm which reduces dividends. Observations show that stock prices drop 15-40% before cut announcement and 5-40% immediately after dividend cut announcement. In average total stock price reduction is about 60% (these numbers came from relatively small set of events, so statistics is pure). Again at 4% annual probability of dividends failure average loss for investor does not depend on number of stocks in the portfolio. Of course I assume that all firms are equally expose to any failure, that failures occur randomly (see also http://seekingalpha.co...), and that dividend investor sells at cut (not always wise – see http://seekingalpha.co...).
    It seems interesting that default is also about 4% for investor grade bonds and bond investors recover in average 40% of principal (i.e. loose the same 60% as dividend “buy and blindly hold” investors). Although I think this is coincidence it might be worth to use bond diversification principles to dividend investing.
    The tricks of diversification are
    a) to choose only companies with lowest failure probability (but I guess Mr. Market prices them accordingly);
    b) to play coherency factors (http://bit.ly/102frew) and here small investors might have some advance with micro and nano-caps which are not investable for Wall Street;
    c) to adjust invested capital to failure probability (well it means as in a) ability to forecast dividend cut and we know that forecasts in finance are very bad – see below).


    PTI: “…But if a stock has increased its dividend for the past 50 years, through thick and thin, then it's a fair bet that they will continue to raise the dividend again next year. And if they have a history of steadily increasing their earnings, year after year, then, again, I think its a safe bet they will increase earnings again next year.”
    Dividends are more sticky than earnings if company has good (in my eyes) dividend culture. It allows David Fish to reach fantastic ability (~ 90%) to time dividend increases for DG stocks. I do not know any other financial forecast with even 80% correct rate for quite huge number of stocks (~ 500 in CCC list).

    NB: I'll also post this (in reduced form) as a comment for my blogpost "Diversification For Dividend Growth Investors".

    SDS
    Jan 1, 2014. 06:36 AM | 1 Like Like |Link to Comment
  • My DGI Plan: How I Keep Investing Simple [View article]
    The Part-Time Investor,
    Thank you for good article. I share many similar points in my DG/HY investing with KISS motto but let me stay critical in 2013 /well I guess I'd not change in 2014 8-) /.

    I do not recall that O'Shaughnessy or Siegel wrote about DGI, can you point edition and pages of their books, please? Please be aware that O'Shaughnessy did a trick (at least in /now old/ edition of "What Works on Wall Street" I read) - he didn't point rolling decades then a strategy underperform (image confidence of investor who underperform let say S&P500 for 10 years). I assume that DGI will underperform S&P500 in some years.

    "The stock must have a culture of paying dividends which increase year after year"
    Yes, the problem that average "life-time in charge" of CEO and BoD is shorter that period I intend to keep stock.

    "Diversification. Since I know I will make some mistakes, the number of stocks I own must be large enough to protect my portfolio from a dividend cut by any one of my positions"
    I run probably one of the most diversified portfolio (compare with reports of several SA fellows) and vote 101% for diversification. Let's assume for a moment that dividend cut is terrible. But any DGi should remember that probability of cut does NOT depend in size of portfolio. At average probability ~ 4% (http://bit.ly/A3tOrH) a DGi with 25 stocks should expect in average 1 cut per year and another DGi with 100 stocks should expect 4 cuts per year in average (of course I ignore quality of companies). Diversification helps IMO but it is a little more complicated (see draft http://bit.ly/102frew I hope to finish in 2014).

    " I know that many will argue that trying to figure out a pending dividend cut before it happens can save you from a large drop in the stock price. This may be true. But it also can be very difficult. "
    Yes it is not simple (http://bit.ly/rrrjkX) but IMO worth.

    "And I think that the most important indicator of what a company will do in the future is what it has done in the past. "
    Hmmm..... Is SEC wrong in "Past performance does not..."? You hopefully right on dividends (if their culture persist in the company) but not in general. Well in the contents I think you wrote this sentence having dividends in your mind.

    commissions - see http://bit.ly/XNfrZV

    "I go with equal weighting of all my stocks."
    I think it is useful to use "invested capital" as yardstick. I just pay CEO/BoD of a company a certain amount of money and hire them to work for me (I guess more sophisticated approach should include inflation to this amount of money but KISS dictates equal weighting). If they work good I might pay them more, if they work bad I will fire them (dividend cut is not necessary "bad" - see http://bit.ly/rrrjkX).

    Happy and prosperous New Year!
    SDS
    Dec 31, 2013. 12:24 PM | 1 Like Like |Link to Comment
  • Dividend Growth Investing 'Is' Total Return Investing [View article]
    1 more cent:
    It is possible to have YoC=20% with DGI in reasonable time (~ 30 years). Can anybody point me another stock strategy that will delivery 20% return year in/year out during retirement?
    SDS
    Dec 31, 2013. 11:14 AM | Likes Like |Link to Comment
  • Dividend Growth Investing 'Is' Total Return Investing [View article]
    "I would argue that a stock that yields 2.5% is no different than a savings account that pays 2.5% interest."
    I disagree. At significant inflation principal of savings account decays with time.
    SDS
    Dec 31, 2013. 09:24 AM | Likes Like |Link to Comment
  • Dividend Growth Investing 'Is' Total Return Investing [View article]
    Total return = dividends + i*price change, where i is the square root of -1 (a.k.a imaginary unit),
    Dec 31, 2013. 01:10 AM | 1 Like Like |Link to Comment
  • Dividend Growth Investing 'Is' Total Return Investing [View article]
    Not, some MFs cannot buy KO because they invest only let's say in Oil.
    Dec 31, 2013. 01:05 AM | Likes Like |Link to Comment
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