Dividends Don't Matter........Do They?

Investing Strategies Abandoned Arctic Outpost #13
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As I have explained the family approach to investing, we depend on Real Estate, Growth Stocks, and Dividend Stocks. The Growth Stock portfolio is slightly larger than the Dividend portfolio with the Real Estate Portfolio swamping them both. Good…Bad…or indifferent - that is how our family invests.

Recently two articles came out on SA: one theorized that Dividends don’t matter with the second claiming just the opposite. For interpretive background here are the articles:

The Pro Side:

https://seekingalpha.com/article/4704865-the-dividends-dont-matter-except-they-do#source=first_level_url%3Ahome|section%3Atrending_articles|recommendation_type%3Adefault|line%3A9

The Con Side:

https://seekingalpha.com/article/4704403-the-dividends-dont-matter-in-retirement-either#source=author_id%3A37131|author_slug%3Adale-roberts|content_type%3Aall|first_level_url%3Aauthor|section_asset%3Aprofile_page_author_analysis|section%3Aprofile_page_author

Note 1). Our Dividend portfolio has 52 companies and an average yield of about 12%.

Note 2). The rule of thumb mantra for retired folks has been that you should withdraw 4% of your retirement funds on an annual basis. We take out the RMD and roll everything else into more shares or new investment into additional income instruments.

Here is the gist of both arguments:

On the Dividends Don’t Matter side the argument is essentially that since the stock price of a dividend paying stock goes down by the amount of the dividend to be paid - the event is a nothing burger. Not only that but some Con dividend folks assert that dividends harm a company by diminishing the funds they have to add value to their company. This first point sounds reasonable because it is accurate; the second point, at least in my mind, is a toss up. Lastly - the Con folks assert that an investor would be better served to simply sell shares of their growth stocks to generate income they might need. This sounds a little dubious to me primarily due to the fact that in Bear markets a growth investor who must sell shares to live is disadvantaged by low prices. So - to wrap up this side of the equation; in the accumulation phase of life simply build a portfolio of the best stocks and then in retirement sell shares as needed to generate income.

The Pro argument says that shares of dividend paying companies not sold are simply perpetual cash machines. This is a stretch for a variety of reasons one of which involves the old “Fight and run away and live to fight another day” concept. Sort of. Additionally, income can be constantly augmented and increased by rolling over (dripping) dividends into more shares thereby increasing income over time.

Interesting argument. Here are a few of our Dividend paying companies:

AGNC: Yield 13.87%. YOC 20.8%. Total Gain +48.7%

BXSL: Yield 10.16%. YOC 14.69%. Total Gain +44.42%

ARI: Yield 12.75%. YOC 17.09%. Total Gain 33.14%

CCD: Yield 10.09%. YOC 16.96%. Total Gain 67.64%

ECC: Yield 20.67%. YOC: 24.96%. Total Gain. 48.1%

Personally, I am firmly on the side of both arguments which is exactly why we have both income and growth portfolios. What I know for sure is that having a large amount of income available in retirement allows us to live a comfortable lifestyle. On the other hand - the growth portfolio has produced solid gains over a dozen years or so. Seems the best of both worlds to me.

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When the company returns a dividend to you, you have the cash. (You may choose to reinvest it, but that is a different thing.) There is nothing that stupid management can do to make it go away. They cannot increase their salaries and bonuses by the amount that is now gone. They cannot buy overpriced shares only to watch them become cheaper in the ensuing months because they overpaid.

That’s not always a great thing, obviously. There are some companies which have shown an adroit ability to reinvest and grow the corporation to gargantuan size over time: Berkshire, Amazon, etc. There are plenty which have shown new and intriguing ways of wasting shareholder property with failed experiments, ridiculous salaries and bonuses, and more.

You are correct. There’s a place for both. It depends on the management - and on whether the company has reached its potential and/or has the leaders smart enough to know it.

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Hi GoofyHoofy:

Couldn’t agree more - on both sides of the line. What I find somewhat amusing, but completely universal, is the sort of knee jerk response - the comments on the respective articles by proponents on either side of the line of scrimmage.

You have the Growth aficionado responses and the Income connoisseur responses. Both are strident. firm and inflexible, if not entirely fanatical but always stereotypical. Neither side much convincing the other that one type of investing is better than the other.

Your comment on Dividends is a key component, perhaps even a cornerstone on the Dividend side of the discussion. The Aficionado side always responds with a standard counter argument which always boils down to the old: Do you place your bet on the Jockey or on the Horse. Both your comment and the Growth folks response are standard ‘boiler plate’ language in the discussion.

I find myself clearly of the belief that in investing switch hitters are rare. More to the point, investors are typically better at one style or the other. With the question always occurring to me: Is it better to focus on improving your weaker side - or - is it better to fully concentrate on the better side. The answer might be found in the baseball analysis mentioned earlier of Switch hitters that can bat from either side of the plate. It is undeniable that batting averages for switch hitters are better on their dominant side.

Love the debate though.

All the Best,
BDH Investing

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Dividends to create automatic taxable events with every dividend. While there are many ways to manage this, it is an avoidable event all together if you simply pay yourself a dividend WHEN you need it.

Put simply:

Instead of thinking I need a dividend paying company to provide cash for my needs, we should instead be thinking, “How does my portfolio provide cash for my needs?”

If you truly understand this, the method of “paying yourself” becomes an arbitrary activity.

Sell stock, collect cash balance funds, whatever. All will ultimately depend on the quality of the investments in the portfolio. As long as you have a liquid market with efficient pricing, you needn’t be concerned with selectively targeting divvies or interest payments specifically. You can just liquidate at a rate that is long term sustainable.

NOTE: Even in the worst of down markets, your distributions will comprise a very small % of the total funds. In the long run, if the portfolio is of adequate size to start, the only true damage is the mental stress of an ill-timed required distribution.

The funds will recover. Your mental health will as well.

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Of course that’s true for most people. The other side of the coin is “Suppose the corporation has more money than it can reasonably invest to grow the business. Suppose the overall sector is declining, but this company is still doing well. What should the corporation do with the excess funds?”

One answer, of course, is “Bonuses for all my friends!”

Another is “Return cash to the owners of the company.”

Third is “Let the cash pile up with subpar returns, then use it to pay creditors when the company goes upside down.”

Touch choice, there.

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Both sides speak from personal experience, preferences and strongly held beliefs that over time cement into unbreachable absolutes. Here is a quote by Yogi Berra from one of the linked articles:

“In theory there is no difference between theory and practice. In practice there is.”

While in theory there is no difference between selling shares to obtain income and collecting that cash from dividend payers - In practice there is a great deal to be said for not having to worry about what positions to sell, the timing of those sells or trims to obtain similar results. The entire enterprise/discussion becomes much more murky when Bear markets depress prices.

All the Best,

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I have no agenda with the following question, just nosy. Some would say that a portfolio of 52 dividend paying stocks yielding 12% must be high risk. The five examples you gave – two mortgage REITs, a BDC, and two CEFs – would be considered by many investors as high risk securities. Curious how you think about and manage the risk of this portfolio, aside from it being only one leg of your three-legged stool.

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Hi Ears:

Hope you are doing well.

Before getting into the mgmt of the income port - let me note something that to most will seem like a crazy statement: 1) Yield has very little to do with risk; albeit, most seem to think so. Yield becomes risky only when the company fails to generate the funds to pay the dividend.

Secondly, In this portfolio I almost ignore overall growth and focus solely on income. Stock prices go up and down all the time - which of course impacts yield. But the income is rock steady. Going from recall only - I can remember only 3-4 of our income companies cutting dividends in the past year or so. Several time that have raised them.

Note: Going forward it’s highly likely that the BDCs will ‘cut’ their dividend but only by eliminating supplementals. Spend a bit of time adjusting their allocations and re-assigning that to more preferred a month or so back.

Ok so with that out of the way - and to answer your question - we do almost zero to manage risk in the income port for three reasons:

  1. We base the portfolio and follow a service that has a very long track record. HDO on Seeking Alpha.

2). Think again about those 52 companies. Each a very minor percentage of the overall portfolio. If one dies - well, as you can imagine its effect is minor on both the income it produces and the overall hit to the bottom line value of the portfolio. Its just not a lot to worry about.

3). We balance the REITs, BDCs and CEFs with many preferred stocks and Bonds with a weighted percentage in each category. Overall, the portfolio is comprised of about 40% Fixed Income.

While I now sometimes only spend several hours a day on the growth side of things - the income portfolio takes less than about 15-20 minutes: just mucking out the stalls, cleaning the tack and shoeing the horses sort of stuff.

Let’s get back to risk. Let me share with you a company we have owned in the income port since Mid 2022:

Oxford Lane Capital. (OXLC)
Yield 19.42%
YOC is Stratospheric
Pays Monthly
Overall Gain: 35+% (With Dividends Dripped)

Now most investors would think that any company paying that sort of yield must be on the ropes. Well I suppose maybe…but, OXLC just raised their dividend by 12.5% in May. That doesn’t sound like a company about to fail. But - if that unnerves anyone, then go for the preferred offering an 8%+ yield.

Anyway - thats the best reply I can offer.

All the Best,

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This is not entirely true. It varies by your individual situation. If you receive dividends in non-taxable accounts, or if you are retired depending on your income level, etc.

It sounds nice, but in practice it will result in selling stocks at the worst time. In a bullish market, you want to let the stocks run and in a bear market you will be selling at worst valuation.

I don’t specifically invest for dividends, but they factor in some of my strategies like covered calls. Today, my portfolio has returned over 2% in dividends and this was achieved without specifically investing for dividends. Many of my long-term holdings are providing like 4%, 5% on my cost basis.

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OXLC has issued shares at 35% CAGR rate. How much of your dividends is financed by these new shares issuance? Suppose, if they hit a situation where they cannot issue additional shares, will they be able to continue to pay dividends? I know nothing about this business, you may want to factor this in your “risky” calculations.

OTOH, some of my long-term holdings like MA, V, LOW, etc pay decent dividends like 2%, but if you look at the dividends on my cost basis, they are great. These companies are able to buyback shares, reduce share count, thus increase my ownership and pay decent dividends. I prefer them over companies which are essentially selling shares and paying high dividends.

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Hi Kingran:

“I prefer them over companies which are essentially selling shares and paying high dividends.”

One of the hardest things to do in retirement is to produce income and particularly income that surpasses inflation, RMDs, and grows over time. You just can’t do that with 2% dividends.

Your investing style, goals and preferences compared to other investors with perhaps different goals, investing styles and preferences is exactly what makes the market. If you are meeting/exceeding your goals then that is what counts.

Since the Income port has one job - to throw off cash; it is designed to out run/beat inflation and cover living costs if needed. Currently it does that almost several times over with all dividends rolled back into more stock and/or additional investments which… continues to grow income. It is a sort of Income Flywheel all on its on and more importantly -it works for us. The 2% you mentioned doesn’t and couldn’t accomplish that. Thats why we also have a Growth portfolio which we consider the rocket fuel to the family wealth plan.

If OXLC falters, hiccups, or dies on the vine, it has more than served its purpose and the hit to the port is minimal.

All the Best,

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Overtime the dividends increase…

You mentioned you need income and you are also talking about buying back more shares with those dividends… and lastly Flywheel…

Return of the capital is far more important than return on the capital.

Hope you know what you are doing and wishing you good luck.

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No Kingran - I never mentioned that we need Income. The entire purpose of the Income Port is to provide cash if we ever do need it. We have had this portfolio for quite a while now and I can’t remember ever taking anything out of it. It’s a safety net, a financial force multiplier and a key component of the family wealth plan.

“Return of the capital is far more important than return on the capital.”

While this portfolio has never - and will never ever, focus on return of capital - it has one single purpose - which it does: produce cash flow if needed.

Look at it this way: In our Growth portfolios we all talk about how the portfolio did last month and give it a score via a percentage. Something like this: YTD the portfolio is up 19.3% driven by a +3.7 percent in June. However there is a difference between the 19.3% which will vary up or down the very next day (See CRWD) - and dividends paid out that could be cash in hand if needed.

Surely we can agree on that. As to whether I know what I am doing - thats a great question and one I often ask myself. So far over the past 40 years or so of investing - despite the occasional 'Big Kaboom!" things have went fairly well.

All the Best,
BDH Investing

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obviously Kingran knows what he is doing…and it’s right :slight_smile:

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Champ?..King?..jeepers, I’m changing my name to El Supremo!

One of joys of the old TMF boards was the occasional visit by a Jedi. Ralph Block was one. Ralph was instrumental in developing the REIT industry from the early 1970s onwards. For many years he was a fund manager and independent advisor to REITs. He wrote a book about REITS which is considered the bible for REIT investing. Yet he’d sometimes drop into the the REIT board to share his wisdom with us peons. Always in a non-judgmental way. He was a Good Person.

Ralph had a favorite saying => “There’s no free lunch”. Whenever someone would describe the outstanding performance of this or that investing approach, he’d always ask “Yes, but to get that result, what are you giving up? There’s no free lunch.”

So, to any newbies reading this thread…perhaps you can earn a spectacular yield of 12% without breaking a sweat. But what would you be giving up to get that yield? There’s no free lunch.

RIP Ralph

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I think you completely missed my point. I will stop with this.

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Yeap… RIP. One of his favorite saying the additional return is not worth the additional risk. Especially on the REIT preferred’s… On couple of stocks we have exchanged notes…

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He shaped my thinking on mREIT’s and ever since I completely stayed out of it. NLY is a great example of high current dividend and losing capital overtime.

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Kingran:

I have taken nothing posted as other than alternate sincere opinions and thoughts. I appreciate your comments - although we will continue to disagree on the issue. Having said that, I welcome additional thoughts as food for thought along the way.

All the Best,

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If anyone has interest, here are a couple of articles which explain the nuts and bolts of exactly how we see our Income Portfolio. Be sure to read through all the commentary and the authors replies. In the commentary are many of the exact things you’ve read in this post. Keep an open mind and just check out the Income Method for yourself. You’ve got nothing to lose except a little time and you might even learn something.

https://seekingalpha.com/article/4702098-dividends-arent-magic#source=author_id%3A102259|author_slug%3Abeyond-saving|content_type%3Aall|first_level_url%3Aauthor|section_asset%3Aprofile_page_author_analysis|section%3Aprofile_page_author

https://seekingalpha.com/article/4703421-why-we-invest-in-income-for-our-retirement#source=author_id%3A102259|author_slug%3Abeyond-saving|content_type%3Aall|first_level_url%3Aauthor|section_asset%3Aprofile_page_author_analysis|section%3Aprofile_page_author

All the Best,

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