Investing 102

[pw2006]

Originally Posted by Chad-1stGen

I've been lightly looking into more dividend stocks in the last 6 months or so. However, I now see these threads popping up on every single site I visit regularly...

Reminds me when everyone was day trading and then everyone was in real estate.

Most stocks I've looked at still seem to have some compelling fundamentals but when everyone and their brother is talking about a dividend investing strategy it has to make you wonder.

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.

[Chad-1stGen]

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.

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.

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.

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.

[GregWeld]

Chad -- Nobody here is going to debate WHAT YOU THINK and WHAT IS RIGHT FOR YOU.... I've said this time and again - and will repeat. You - the individual - must sleep at night with the decisions you made for your investments.... regardless of what that is.

Having said that... you left out the fact that IF and WHEN interest rates rise - your bonds are going to be just as hammered (capital)... and that interest rates tend to rise slowly and are WELL TELEGRAPHED by the fed. There is plenty of time to bail from whatever strategy you've employed.

Now -- if and when interest rates start to rise - which will also telegraph that things (economically) are getting better - which generally leads to a RISE in the stock market... so, much of the "loss" of the dividend % paid is made up with the corresponding increase in capital gains. You must take the two together - capital increase and dividend payouts in order to calculate your return. The market will (should) rise in a interest rate rising environment "at first"... because it signals strength in the economy - then inflation will set in - and yields will fall - and so to, will stocks.

Back in the mid 70's and early 80's -- you didn't need to own stocks because a bank CD would pay you 12%! But those are market cycles and 99% of the folks can't "time" them. And we're talking about steady eddy investing here not market timing. Even though I understand what you're talking about.

BONDS - Of which I have a HUGE position in - are TERRIBLE investments unless you're already retired or are very near retirement and you just can't bear to have any capital loss (you'd hold to maturity). They have no capital growth but are bought for SAFETY and for the tax free (albeit below "market" rates) dividends. Unless you're a trader - and that isn't what INVESTING 102 is about.

Personally -- I wish we had RAGING INFLATION.... I owe nothing - and would be happy as a pig in poo to be getting 10% interest in a money market fund/CD.... but the folks old enough to remember those days will tell you that they weren't good times at all.

[Chad-1stGen]

Originally Posted by GregWeld

Chad -- Nobody here is going to debate WHAT YOU THINK and WHAT IS RIGHT FOR YOU.... I've said this time and again - and will repeat. You - the individual - must sleep at night with the decisions you made for your investments.... regardless of what that is.

Having said that... you left out the fact that IF and WHEN interest rates rise - your bonds are going to be just as hammered (capital)... and that interest rates tend to rise slowly and are WELL TELEGRAPHED by the fed. There is plenty of time to bail from whatever strategy you've employed.

I wasn't advocating bonds either. To me, my post still clearly states that its not good to own interest rate bearing securities (which includes bonds) in a rising rate market.

Bonds and Dividend stocks scare me a bit because I expect both of them to get hammered if interest rates rise rapidly.

I wished I owned a hell of a lot more bonds the last decade than I did (mostly 100% equity invested). As of now I have less than 10% of my money in bonds and have trouble significantly increasing a bonds position given where rates are at.

I was generally comparing dividend stocks to a total stock market index fund like VTSAX which has been yielding 2% and which I think has a much better chance of actually achieving the following statement you made:

Originally Posted by GregWeld

The market will (should) rise in a interest rate rising environment "at first"... because it signals strength in the economy - then inflation will set in - and yields will fall - and so to, will stocks.

Fair enough on debating what is right for each individual. I've seen this thread building for a while and thought it worth putting out some additional viewpoints on dividend investing that I haven't seen discussed. Namely the tax efficiency of it and its increased sensitivity to interest rates. At the end of the day I'm still very interested in getting some more dividend specific stocks and had been researching it quite a bit before this thread ever popped up but is why I've been following this thread. However, it is good to have different perspectives (the point of this thread) and you are extremely bullish on dividends

[GregWeld]

Originally Posted by Chad-1stGen

I was generally comparing dividend stocks to a total stock market index fund like VTSAX which has been yielding 2% and which I think has a much better chance of actually achieving the following statement you made:

Since this is an EDUCATIONAL thread - I will try - as I have been trying - to explain reasoning and thought process in all my replies. I'm not "debating" any actual thought process - rather - trying to open it up and just discuss these ideas and thoughts for the purpose of educating - and let the reader decide what the take-away points are for themselves. I'm also trying to be at the kindergarten level so when someone reads my posts - they can actually have an "ah ha" moment and actually understand, in a broad general way, what I'm saying.

I have stated previously that I fail to see the point of mutual funds and or other types of funds that attempt to just buy a basket of stocks and try to "emulate" some index (and they also have associated fees). The VTSAX that you mention does just exactly that. It's merely a basket of stocks - blended - and has a "dividend" of 2%.

So here's my educational pitch for individual stock selection and thus making your own mini mutual fund - which should - in absolute terms - provide a higher rate of dividend and that is made up of stocks the owner can actually "understand" and have some control over etc.

The VTSAX simply holds stocks to emulate "the overall stock market" -- and in good times that might be great - you'd get some capital growth - but the dividend spin off of 2% isn't sufficient to carry the investment thru the inevitable downturns.


Here's the funds top ten holdings:

Exxon Mobil Corporation (XOM)

Apple, Inc. (AAPL)

International Business Machines Corp (IBM)

Chevron Corp (CVX)

The Procter & Gamble Co (PG)

Johnson & Johnson (JNJ)

AT&T Inc (T)

General Electric Co (GE)

Pfizer Inc (PFE)

And here's why I'm trying to educate rather than try to just say "buy this or buy that or don't do this - do that"...

AT&T's current dividend is 5.83% ----- ALMOST TRIPLE what the VTSAX is paying out - and it's a holding of this index fund

GE's current dividend is 3.76% --- ALMOST DOUBLE what the VTSAX is paying - and is a holding of this fund

So with barely any research at all -- a person should be capable of getting a better dividend return -- and if all you want to do is emulate the stock market, any number of the biggest of the bigs will and have done that for years and years.

Now -- Please don't take me wrong - I'm not arguing with you. I am however - trying to educate people to help them see that they are perfectly capable of going out and "investing" and having a bit of fun doing so - and have a firm grasp on what it is they own, and their reasoning behind it.

If you had 10,000 to invest -- why settle for a market emulator that's going to go down with the market or up with the market and it's going to pay you less than the rate of inflation to hold on to it. A guy could just buy AT&T and at least triple his dividend rate and perhaps stay above the rate of inflation. I'm on a flight - so don't want to do the math - but a 6% compounded rate of return over time is going to be so far ahead of a 2% it isn't funny.

[Kingcater]

First post here as I mostly lurked enjoying all the builds I can't afford from afar. Never registered because I don't have a Pro Touring car yet ( but maybe this thread will help with that in the future )

Anyways, I was looking on google since I've finally found a long term career as I was and I'm getting to an age where I need to think about my financial future. I have to say the knowledge in this thread is very awesome and it also explains things in a manner pretty much anyone can comprehend. I've even forwarded it to many friends.

Who would've thought a Stocks/Investing thread would finally be the thing to get me to sign up to this site.

Once again thank you OP for making this thread. Also thank you Greg, PW2006, and others for continuing to post in this thread. I'm only 34 pages deep but I went out and bought a notebook to take notes.

I hope to have enough money saved up in the next 6 months to start diving into Investing. I was apprehensive as I didn't know where to start but this thread has really helped me!

[ErikLS2]

Originally Posted by Kingcater

First post here as I mostly lurked enjoying all the builds I can't afford from afar. Never registered because I don't have a Pro Touring car yet ( but maybe this thread will help with that in the future )

Anyways, I was looking on google since I've finally found a long term career as I was and I'm getting to an age where I need to think about my financial future. I have to say the knowledge in this thread is very awesome and it also explains things in a manner pretty much anyone can comprehend. I've even forwarded it to many friends.

Who would've thought a Stocks/Investing thread would finally be the thing to get me to sign up to this site.

Once again thank you OP for making this thread. Also thank you Greg, PW2006, and others for continuing to post in this thread. I'm only 34 pages deep but I went out and bought a notebook to take notes.

I hope to have enough money saved up in the next 6 months to start diving into Investing. I was apprehensive as I didn't know where to start but this thread has really helped me!

It will be the best thing you ever did for financial stability in your life when you look back years from now. Welcome aboard too!

[Kingcater]

Originally Posted by ErikLS2

It will be the best thing you ever did for financial stability in your life when you look back years from now. Welcome aboard too!

Thank you and you're absolutely right. I have a 2000 Camaro Z28 and a 2005 GTO.

I hope to have a Pro Touring C10 Square soon

[GregWeld]

Originally Posted by Chad-1stGen

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.

That sounds GREAT --- tell me which stocks you're going to guarantee me are going to go up. Because that is the MAJOR difference in dividend investing and investing in pure capital growth. Most people can not pick which stocks are going to rise. And with that comes RISK... Dividend investing -- in the kind of names we've been discussing - have a history - AND pay that dividend. What that can do for you is cushions and comforts during the downturns and creates income for reinvestment.

TAXES are a whole different discussion... and unless someone is a "seer" you can't predict what our infamous bozos in Congress will or won't do.... TAXES and their scenarios need to be discussed with a CPA on an individual basis. What my tax situation is, will be far different than someone else's.

[Chad-1stGen]

Originally Posted by GregWeld

That sounds GREAT --- tell me which stocks you're going to guarantee me are going to go up. Because that is the MAJOR difference in dividend investing and investing in pure capital growth. Most people can not pick which stocks are going to rise. And with that comes RISK... Dividend investing -- in the kind of names we've been discussing - have a history - AND pay that dividend. What that can do for you is cushions and comforts during the downturns and creates income for reinvestment.

TAXES are a whole different discussion... and unless someone is a "seer" you can't predict what our infamous bozos in Congress will or won't do.... TAXES and their scenarios need to be discussed with a CPA on an individual basis. What my tax situation is, will be far different than someone else's.

Ha ha you are replying too fast for me

Obviously neither of us can guarantee a stock is going to go up (whether it pays dividends or not). You have shared a lot of examples of investments in this thread but to be fair the only way to truly compare different portfolio's is to look at the net IRR based on the specific cash flows of an investor's total portfolio, not just specific investments.

Re: Taxes yes they are complex but that doesn't mean you should ignore them. And I wasn't attempting to forecast what the Gov't would do with taxes. Just pointing out the fact that starting in 2012 dividends will be taxed as ordinary income which is known right now.