Thoughts On Dividend Income

This is a post about dividend income

There has been some drama in the dividend growth investing (DGI) blogosphere. The guy who ran Dividend Mantra sold it to an outside company, and for months there was little original content. The sellers said the original author (henceforth DM) would still provide content, but there was nothing.

There were a lot of comments expressing discontent, and those posts were later deleted.

This led to some discussion on other sites. One was Mr Money Mustache.

Most people there are indexers and said DGI is not as good. Obviously, I disagree.

One person said DM was stupid for only using taxable accounts and putting no money into tax-advantaged accounts. That I agree with.

A few MMM posters disputed the notion in DGI that selling shares is like sawing off a tree branch while you are sitting on it. I agree with that metaphor. You can only sell shares once. But many companies pay dividends for years. It’s sort of like a cow or a chicken. You can get milk or eggs from them multiple times, but you can only eat them one time. You can only sell a share once. My goal is to never sell and to live off the dividend income.

Some on the MMM forum that the DGI investors might not reach the goal of living off dividends. That is true, but that is not a valid objection to DGI. ANY plan could fail. If that invalidates DGI, it invalidates everything.

One person pointed out that while index investing can be judged by total return, DGI should be judged by the growth of the dividend income. Many on the forum disagreed, and insisted total return is the ONLY way to judge a portfolio. I disagree. While it is bad if a stock goes to 0, the point of DGI is to not rely on price alone (at least that is the point for me). We saw a lot of people get hosed relying only on price in the dot com bust with stocks, and for just about every asset class in the Great Recession. Meanwhile, many DGI stocks kept paying. The funny thing about relying on price is that when you really need money, usually the price goes down. Dividends are not guaranteed, but neither are capital gains. And you might not get them when you REALLY need them.

Maybe things will change in the future, but if the same thing happens for two cycles in living memory, you should pay attention.

Plus, I invest in some pretty big companies. If my stocks go to 0, then whatever you are investing in is probably hosed too.

I don’t think a lot of indexers understand DGI. Some of them accused DGI investors of chasing yield. As I have mentioned in the past, for many DGI investors, a high yield is actually interpreted as a sign to get out. Most prudent DGI investors also look at P/E ratio, payout ratio, and dividend history.

To me, “chasing yield” is holding a stock that pays 10% for a year and then selling. Most of the stocks that DGI investors are interested in have yields from 2% to 4%, and we intend to hold for a long time. Ideally, for life.

I am considering going more towards DGI ETFs. That is sort of like indexing. It’s like “indexing without the bad stuff”. But I really have no desire to buy the whole domestic market if I can avoid it. My 401K through work offers regular index funds, but no DGI funds; in this blog I mostly talk about accounts that I have full control over. As I said, I do not want to rely on capital gains. I want cash flow. Not potential cash flow. Not theoretical cash flow. Not cash flow dependent on getting a higher price. Not hoping the price will be higher when I need to sell. But actual cash flow. As Josh Peters wrote in The Ultimate Dividend Playbook, when a private equity firm want to take a company private, their offer price will be based on the company’s cash flow. Why not get that money now? Why wait until I sell? If the only time you benefit from owning a stock is when you sell (in other words, when you stop owning it), then it is pretty dumb to own that stock in the first place. Why should my money go into firms that are not paying dividends? As far as I am concerned, US stocks that do not pay dividends are dead weight.

Granted, with foreign firms, it is a different story. There are not as many DGI ETFs for foreign stocks. Directly buying a stock listed on a foreign exchange would cause more tax headaches than it is worth. But for stocks on domestic exchanges, and as for my house, we stick with DGI.

One person said indexing is better, and asked if us DGI investors thought we were smarter than the market, and advised us to listen to what the market is telling us. Well, it has shown that companies that have grown their dividends do better than the total market. S & P has a page on the Dividend Aristocrats, and it has a chart applet that you can use to compare the Dividend Aristocrats against the S & P 500. Guess what? The Dividend Aristocrats do better than the overall market. So, no, I don’t think I am smarter than the market. Unlike you, pompous indexer, I am listening to what the market is telling me.

The High Yield Dividend Aristocrats also did better than the S & P 500, but not quite as much.

Also, if you look at the fact sheets for those indexes, the “High Yield” Dividend Aristocrats index yields about 3%, while the regular Dividend Aristocrats index yields about 2.52%. The High Yield Dividend Aristocrats index has stocks that have increased dividends for 20 years, while the Dividend Aristocrats index has stocks that have increased dividends for 25 years. So I guess “High Yield” is relative.

There was a lot of discussion about the returns of DM. Some said the only reason his portfolio gained was because he added capital to his accounts. Below is a very large table with information about some of my dividend holdings. This shows stocks for periods in which I did not buy any additional shares. I did re-invest the dividends.

For each stock, there are two rows. The first is the first dividend payment I got. The second is a more recent payment. This chart was made earlier in the year, so it does not have the latest. For some, it might have a transaction from a couple of years ago. For each stock, I looked at the earliest and latest for a time period in which I only got new shares through dividend reinvesting. For the second row of each stock, the “Income Increase” is calculated by dividing the second income amount by the first. The “Div Percent Increase” is calculated by dividing the second dividend payout amount by the first. Some stocks split, so that may affect the amounts. I think the “Income Increase” is more consistently useful.

So for ABM, the income from the dividends increased 34%, while the payout amount per share increased 19%. I also went from having 50.3 shares in 2010 to 56.74 five and a half years later. I would say that is a pretty good return.

Image generated from an applet on S & P site, assumed allowed under Fair Use. This shows that the Dividend Aristocrats (the blue line) outperformed the S & P 500 (the green line) over the past ten years.

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