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Originally Posted by pw2006
Hi Chad- The stock market has been a little rough the past 10 years or so. The S&P 500 is flat over the last year and last 10 years, with lots of volatility. Interest rates on govt bonds are so low right now, they are not keeping up with inflation. If you were to invest in 30 yr govt bonds to try and get some return (~3%), as soon as interest rates start to rise, your principle will drop (unless you hold them to maturity). Dividend stocks tend to be less volatile, typically drops less when the market falls and rises slower when the market rises, this is also referred to as beta. So, a lot of people are looking at dividend stocks that have a decent yield and less beta than the market.
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You are telling me. I've invested money into the stock market straight out of my paycheck every single month since 1999. I know just how bad the market has sucked the last decade+ Good news is that I learned I can hold things for the long haul even when things look terrible (2008/2009).
Correct me if I'm wrong but beta within the context of the stock market isn't a measure of volatility or risk by itself. I believe beta is the measure of the volatility of an investment compared to the overall stock market. Beta of 1.0 moves lock step with the market. Beta of 0.1 will pretty much do its own thing and not impacted by the market or events that tend to impact the market.
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Originally Posted by GregWeld
BTW -- I think this is a FANTASTIC observation.
I have always said -- if the grocery clerk tells you about the latest great way to make money --- RUN --- RUN AWAY from that idea - whatever it is -- because by the time the clerk is in -- it's nanoseconds from complete collapse!
I do not feel this way about DIVIDEND investing. Because of the reasons I stated in my earlier post.
I really just wanted to say - this is EXACTLY the kind of info and thought processes that I love to see in this thread -- because you are spot on! EVERYONE is looking for YIELD... because the world is in a deflationary period and it's just harder and harder to figure out where to get a decent return on your funds. If there's no "growth" -- then the growth stocks (they don't pay dividends) suck - if there's too much growth - then the interest rates will go higher and money will move to "interest bearing" stuff and out of the stock market. But -- BIG BUTT -- If a dividend paying stock price goes DOWN -- then the dividend % actually RISES.... so the dividend paying stocks tend to stay in lock step with other interest rate bearing "investments". Their share price might go down - but that dividend is declared as a dollar (cents) amount not a percentage of the share price..... so as the share price declines the percentage of the dividend rises. When the share price declines - I tend to buy more shares. It brings my average cost down - and keeps the dividend return percentage near where I need it to be.
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I bolded the part that scares me the most about plowing money into dividend payers right now. The reason bonds have done amazing the last 25+ years and managed to kill stock market the past 10+ years is interest rates have been steadily declining since 1984. It's a damn good time to own interest rate bearing investments during a decreasing interest rate environment. It's not so good during an increasing rate environment.
If rates spike in 5 years, dividend stocks yielding ~3% are going to get killed if they don't have growth potential to keep them buoyed. Why buy a dividend stock that consistently pays our ~3% dividend when you can buy a significantly lower risk item (traditionally a bond) or even risk free item (CD) paying much higher? That's right you won't. So the dividend payout has to increase or the stock price has to fall to keep yields attractive.
Interest rates can't go down and the Fed has basically promised to keep rates flat for 2 years but then what?
I'm an investor and not a market timer so I keep putting a big chunk into the market month after month. And like I said there are some good dividend payers that I want to buy but between the tax inefficiency** of dividend stocks and the fact a total market index fund like VTSAX has been yielding 2%+ I don't know if the extra 1%-2% average yield is worth losing the growth potential of something like VTSAX
in light of what I believe interest rates will do... in the long run
** For me purchasing individual stocks in a 401K is not an option, only my IRA. $5k a year isn't going to make a whole lot of difference so that leaves after tax investing. With dividend gains returning to ordinary income tax rates next year dividend investing is tax inefficient.
For others reading along. If buy two investments. Investment A for $100 and investment B for $100. Investment A stock prices grows 5% a year and pays a dividend of 5% a year that you reinvest for 10% total returns per year. Investment B doesn't pay a dividend but grows 10% a year so that both investment's A and B total return is equal. You pay zero taxes on investment B until you sell and currently that would be taxed at a lower rate than ordinary income taxes. Investment A would trigger taxes every year and at the end when you sold (if you sold) your return after taxes would be less.
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Hopefully this explanation will help limit your concern regarding bubbles. The great thing about investing in stocks, is that the companies are public (owned by shareholders) and must report their financials information each qtr. When stocks start to get bubblicious, you can typically see this in their price to earnings (PE) ratio. Since 1900 the average PE ratio of the S&P 500 is ~15. The current PE ratio of the S&P 500 is around 13, which would suggest that the S&P 500 is not overpriced on a historical basis.
But this "method" had worked so well for me in the past that I just kept chasing it down! 
It never fails. 
But -- there's that butt again - you always need to "rebalance" the portfolio... and if the stock has gained so much that you're out of balance - you want to sell some of it and buy something else (diversify!).... Yeah -- it can keep going -- and you'll kick yourself for not having held every dime when it doubles again.... BUT that's where the old saying "pigs get fat and hogs get slaughtered" comes from. Better to be a profitable pig. Think about it this way as well - if you had a double - and sell half - the balance is "house money". That is a very nice place to be! 
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