Seeking Alpha

SDS (Seductive ...'s  Instablog

SDS (Seductive Dividend Stocks)
Send Message
Sorry I hide my true identity but I'm a physicist/engineer, native contrarian and idea generator. I am an eclectic dividend investor with motto "In God We Trust, All Others Pay Cash" applied to companies I invest in. I like to read /and read a lot - did you look on my SA photo 8-)? /... More
My blog:
SDS blog in Seeking Alpha
View SDS (Seductive Dividend Stocks)'s Instablogs on:
  • Is Dividend Growth Investing Robust? (28 April 2012)

    I think that dividend growth (NYSE:DG) investing is solid income strategy but there are at least 2 caveats:

    1. some companies cut or even omit dividends;
    2. dividend growth rate for a company declines with time (due to a company life cycle - see e.g.

    In this note I investigate it robustness to 2 factors outlined above.

    Academic studies (see results review in show that in average about 3% of companies with stable or growing (during previous 5-7 years) dividends cut them. Of course, more payers reduced or omitted dividends during ~1930 and ~ 2008 depressions but 3% seems reasonable number.

    Long history of actively managed index S&P500 (which populated with new growing companies and dumped out from badly performed companies) shows that average dividend change rate (DCR) is about +5%.

    I mimic both factors for passive portfolio in a simple exercise. I presume that absolutely passive DG investor ("buy-and forget" type of behavior) forms portfolio with initial average 3% yield on cost (YoC). The portfolio has DCR = 5% during 1st year of investing and then DCR gradually decreases (to less than 1.5% after 50 years) but always positive, for sake of simplicity I just increase yield on 0.15% annually. These numbers are at least very modest for any realistic DG portfolio but I presume zero inflation in this example. Analysis of David Fish Dividend CCC list (fig. 1) shows that DCR decreases with time of an average company's dividend payments.

    (click to enlarge)


    I assume worst and almost worst case scenarios:

    1) investor loses all money invested in a company that cut or suspend dividends, i.e. the company's stock is delisted immediately.

    2) investor loses 50% of money invested in company that cut or suspend dividends and uses the second half for purchase stock of another company with positive DCR.

    I'd like to point that it is NOT always wise to sell stock because a company cut dividends (see "Don't panic if dividends were cut" in my instablog but many DG investors consider such event as sell trigger. So number of "dividend cows" in portfolio of such investors decreases with time.

    Results are shown in fig. 2 plotted from numbers in the table (fig. 3).


    (click to enlarge)


    Even in the 2nd almost worst case DG investor will see income increase in the first 30 years after the passive portfolio formation from remaining dividend growth companies with decaying positive DCRs. Not so fast DCR decay or smaller average loss of stock price after dividend cut lead to longer period of DG investment robustness.

    Added 17 Jan 2014:

    Prof. B. Cornell in 2012 Working Paper "Dividend-Price Ratios and Stock Returns: Another Look at History" shows that, ex-post, long-run real dividend growth never changes - it mirrors long-run real GDP

    (click to enlarge)

    growth at about 3% per year in USA (see picture above). So economy probably an important factor for DGI.

    Apr 28 6:02 PM | Link | 4 Comments
  • Re-Reading "A Random Walk Down Wall Street" By Burton G. Malkiel (27 April 2012)

    One of first book on investing I read ~ 15 years ago was "A Random Walk Down Wall Street" by Burton G. Malkiel. Prof. Malkiel is well known proponent of index fund investing. Under this and few other good books influence I invested (and still keep a big chunk of my 401K) in S&P500 index fund. But from 2006 I transformed myself in eclectic dividend investor (see my SA profile).

    I'm reading 2007 edition "A Random Walk Down Wall Street" by Burton G. Malkiel - it seems even he agrees now (or I didn't put attention in the beginning of my investment journey) that dividend deliver 90% of total stocks return in the long run (see chapter 13 of the book). So keeping in mind that I'm biased to dividend investing, let analyze Prof. Malkiel on dividend. He points that grow rates of earnings and dividends (including stocks buybacks in recent years) are very similar and Prof. Malkiel mostly uses earnings (this is probably really better because not all companies pay dividends). Simple observation of 2 diagrams reproduced below (figs 1and 2) with common knowledge that dividends are paid out of earnings do not leads to any surprise: return on cheap stocks (low P/E or high dividend yield) are higher than on expensive stocks and small difference in actual numbers can be IMO neglected.

    (click to enlarge)

    Fig. 1.

    (click to enlarge)

    Fig. 2.

    Prof. Malkiel points about fig.1 (fig. 2 was constructed similar):

    "The diagram was produced by measuring the dividend yield of the broad US stock market (in this case, the Standard & Poor's 500-Stock Index) each quarter since 1926 and then calculating the market's subsequent ten-year total return through the year 2005. The observations were then divided into deciles depending upon the level of the initial dividend yield. In general, the exhibit shows that investors have earned higher total rates of return from the stock market when the initial dividend yield of the market portfolio was relatively high, and relatively low future rates of return when stocks were purchased at low dividend yields."

    Then he comes to strange conclusion:

    "Finally, note that this phenomenon does not work consistently with individual stocks. Investors who simply purchase a portfolio of individual stocks with the highest dividend yields in the market will not earn a particularly high rate of return."

    But each deciles (one tenth) of S&P500 is by definition contains only 50 stocks - quite reasonable number for investor's portfolio (my is more than 2X large). I guess Prof. Malkiel is too biased to index investing.

    I agree with Prof. Malkiel notes related to dividend growth investing:

    "… growth at 15 percent rate means that dividends will double every five years… The catch is that dividend growth does not go on forever, for the simple reason that corporations and industries have life cycles similar to most living things."

    See for an example of business life cycle. My analysis of David Fish list of companies that increse dividends for several years (fig. 3) shows that dividend growth decline with period of rising dividends.

    (click to enlarge)

    Fig. 3

    I agree with Prof. Malkiel notes related to dividend capturing investing:

    "A good deal of research has also been done on the usefulness of dividend increases as a basis for selecting stocks that will give above-average performance. The argument is that an increase in a stock's dividend is a signal by management that it anticipates strong future earnings. Dividend increases, in fact, are usually an accurate indicator of increases in future earnings. There is also some tendency for a strong price performance to follow the dividend announcement. However, any rise in price resulting from the dividend increase, although perhaps not immediately reflected in the price of stock, is reflected reasonably completely by the end of the announcement month."

    BUt I need to admit that dividend capture is very risky business.

    At the end I'd like to use quote Prof. Malkien cites:

    "In investing money, the amount of interest you want should depend on whether you want to eat well or sleep well./ Kenfield Morley "Some Things I Believe" "

    I believe the dividend investing helps me sleep well.

    The lesson I hope you'll learn from this review: use your own mind and be critical when you read finance books, even an excellent one as "A Random Walk Down Wall Street" just because an author can have own sometimes hidden agenda which is not coincide with your best interest.

    Apr 28 8:20 AM | Link | 2 Comments
  • My 2 Cents On Taxes. 26 April 2012

    Let me say in front - I hate anybody who puts hands in my pocket and try to steel my money. It can be a robber or a greedy unprofessional service guy or a taxman - anybody. I earn my money by hard work and I believe that anybody must keeps his "dirty" hands out.

    But I understand that any citizen has to pay taxes even if a government wastes half of money it collects for nothing. I believe that tax code must be simple and short - maximum 200 pages and any trick of individual or company with taxes must be prosecuted by a government. On another hand, the government cannot change taxes on political or economical or any another fashion or will without citizens referendum or voting. The only exclusion is a war or country disaster (but the latest probably should be covered by a reserve) when a president or some government body can post temporary tax with clear explanation of it purpose and expiration.

    Now as a dividend investor in a dozen years from retirement I concern about dividend taxes. Looking on history of dividend taxes in USA I can easily conclude that persons imposed these taxes had no consistency and no respect to investors at least and probably even not fully functional brains at most. I believe that dividend taxes as well as all other taxes should be fixed and not change with time. I believe that dividend taxes must be equal to capital gain taxes. If a government has 2-tier capital gain taxes (and I agree that tax on short-time gains should be higher than long-term capital gain tax), the dividend taxes must be the same. An investor should pay tax equal to short-time capital gain tax on dividend of stocks she has less than 1 year. Also an investor should pay tax equal to long-time capital gain tax on dividend of equity she has more than 1 year. Again tax code must be simple and short, understandable and free from loopholes, almost permanent (I think the president should have right to accept only 1 change during his 4-years term) and legaly consistent.

    Being a political refugee I probably more active than an average citizen (so I sent out this proposal to my representatives in US Congress) but I urge any dividend investor to delivery this message to her representatives. Our voices will be count and hopefully change tax rules if we'll be persistent in protecting our pockets from "dirty" hands.

    Apr 26 8:56 AM | Link | 4 Comments
Full index of posts »
Latest Followers


More »

Latest Comments

Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.