PP vs Dividend Growth Investing

Discussion of the Stock portion of the Permanent Portfolio

Moderator: Global Moderator

User avatar
shekels
Executive Member
Executive Member
Posts: 251
Joined: Sun Jun 02, 2019 9:01 am

Re: PP vs Dividend Growth Investing

Post by shekels » Sun Feb 16, 2020 10:48 am

vnatale wrote:
Fri Feb 14, 2020 7:10 pm


There is one public company. You are its sole owner. When it was started it had $1,000 in cash, $4,000 in real estate (unimproved land) and no liabilities. You paid the net book value for the company - $5,000.

Five years later, you are still the sole owner, the company still has that $1,000 of cash and still with no liabilities, but it's developed that real estate so it is now worth $29,000. You've received no dividends along the way. You decide to sell to me who is willing to pay the current net book value for the company - now $30,000.

You now have a gain of $25,000. No dividends. All from capital appreciation. I purposely kept out any hoped for future valuations to keep it simple.

If you had received dividends of $1,000 along the way, there would have been $0 cash and then I'd have only bought it from you for $29,000. You still received the same total $30,000 minus your $5,000 basis for the same $25,000 total return.

Am I missing something?

Vinny

Where did the money come from to develop that Real estate, so that it is worth 25,000 more?
What was the cost of the taxes on the improved real estate?
The 1,000 in cash could of been used in the expenses for the taxes or the development right?
Wash your damn hands, people.🙏
¯\_(ツ)_/¯
SPX < 1800
Gold < 1300. Maybe,
Until the FED said "Hello" to MMT >:D
https://fred.stlouisfed.org/series/WALCL
User avatar
shekels
Executive Member
Executive Member
Posts: 251
Joined: Sun Jun 02, 2019 9:01 am

Re: PP vs Dividend Growth Investing

Post by shekels » Sun Feb 16, 2020 11:10 am

Xan wrote:
Sun Feb 16, 2020 9:15 am
Getting a return by selling requires a buyer. Agreed? That means that investors are passing around money and shares, but the sum total of all investors have not achieved more dollars until a dividend is paid. (Boglerdude might be right about buybacks, but I think that's a sneaky dividend.)

How is it possible for dollars to be created by exchanging shares with other investors?

You are not arguing in good faith if you are assuming your initial presumptions are correct, and then choosing to ignore anything that disagrees with them.
I hate to type so I will make this brief.
IMHO Dividends are received as a means to extract value or profit from a stock/company.
The other way to extract profit is by selling a stock at a higher price than was purchased, which is not always possible.
The difference I see is from profits from the gain of a company, and a profit from a stock of a company.
Both have a effect on share price.
Yes, stocks go up and down but what is the true real value of a stock? To me It is a Confidence game.
How confident are you in the management,practices,assets and the future of the company.
Take for instance ATT, If no dividend was paid what would the stock be worth with the debt load they have today?
Wash your damn hands, people.🙏
¯\_(ツ)_/¯
SPX < 1800
Gold < 1300. Maybe,
Until the FED said "Hello" to MMT >:D
https://fred.stlouisfed.org/series/WALCL
User avatar
Smith1776
Executive Member
Executive Member
Posts: 888
Joined: Fri Apr 21, 2017 6:01 pm

Re: PP vs Dividend Growth Investing

Post by Smith1776 » Sun Feb 16, 2020 11:26 am

Xan has it right in this debate.

People confuse the idea that dividends are not a factor with the idea that dividends are a stock's only source of value to the investor. A stock is only valuable because it either pays a dividend now, or is engaging in plowback theory to presumably pay more dividends in the future. This doesn't invalidate the fact that dividends are simply a payment of your own property and are not a factor. There's no contradiction there.

I was confused on this issue myself a while back, and engaged in a PM discussion with the king of dividend irrelevance himself: Larry Swedroe.

It really boiled down to this exchange.
question.png
question.png (26.63 KiB) Viewed 300 times
response.png
response.png (30.96 KiB) Viewed 300 times
Make no mistake, a stock's only source of return and value is either the dividend being paid in the present, or the fact that its ability to distribute dividends in the future is increasing. Either way, the dividend is the source of the return. This should never be confused with the fact that dividends are not a factor. Totally separate issues.
e + 1 = 0
Any computer is a server if you're brave enough.
The Permanent Portfolio will be safe enough to walk away from and forget about completely only if it allows for more than just the problems and hazards that are obvious today. It will have to allow for all of the unforeseeable events of the next 5, 10, 15, or 20 years.
User avatar
mathjak107
Executive Member
Executive Member
Posts: 2565
Joined: Fri Jun 19, 2015 2:54 am
Location: bayside queens ny
Contact:

Re: PP vs Dividend Growth Investing

Post by mathjak107 » Sun Feb 16, 2020 11:34 am

I disagree of course ,dividends are part of the total return and roi on your investment. Appreciation from growth of the company shares ,compounds returns on an investors money , the paying of a dividend is just taking some of that growth FROM THAT APPRECIATION and giving the investor the option of taking some out or he can stay as is like any stock that pays no dividend and reinvest the same dollars they handed him back in the same value he had before.

It all stems from growth of the share value or you have no roi at all despite getting that dividend ...shares grow in value for all the reasons above and that is why investors want those stocks like Berkshire or any of those 78 s&p stocks

Rebalancing share appreciation in a portfolio provides cash flow, what is important is the compounding on investor dollars , not how it is drawn off
User avatar
Smith1776
Executive Member
Executive Member
Posts: 888
Joined: Fri Apr 21, 2017 6:01 pm

Re: PP vs Dividend Growth Investing

Post by Smith1776 » Sun Feb 16, 2020 11:47 am

I see what you are getting at, but again, I think you are taking the idea that dividends are not a factor a little too far.

The gold standard for firm valuation in every finance course, degree, program, and certification in the world is the dividend discount model.

There is just no getting around that fact. The dividend discount model is king.

A firm is only valuable based on its current distribution of dividends or its growing ability to distribute dividends in the future. In the case of Berkshire Hathaway, the firm is as valuable as it is not because of any current dividend (obviously), but because its ability to distribute dividends grows over time.
e + 1 = 0
Any computer is a server if you're brave enough.
The Permanent Portfolio will be safe enough to walk away from and forget about completely only if it allows for more than just the problems and hazards that are obvious today. It will have to allow for all of the unforeseeable events of the next 5, 10, 15, or 20 years.
User avatar
mathjak107
Executive Member
Executive Member
Posts: 2565
Joined: Fri Jun 19, 2015 2:54 am
Location: bayside queens ny
Contact:

Re: PP vs Dividend Growth Investing

Post by mathjak107 » Sun Feb 16, 2020 12:01 pm

There are loads of mid caps and small caps that will never pay a dividend ever ...so in theory we can make up all the reasons we like for cause and effect

...the reality is that it is what it is and stocks grow and produce wealth for share holders never ever producing a dividend and shareholders produce cash flow from those stocks or sell and gain appreciation and make money ....and that’s the way it works
User avatar
Smith1776
Executive Member
Executive Member
Posts: 888
Joined: Fri Apr 21, 2017 6:01 pm

Re: PP vs Dividend Growth Investing

Post by Smith1776 » Sun Feb 16, 2020 12:32 pm

Yes, and those stocks, when the market sees that they have diminishing prospects for ever paying a dividend, fall in price. So no conflict there.

It's not made up -- it's the dividend discount model. The gold standard for valuing stocks and firms. Again, this should not be conflated with the fact that dividends are not a factor.

And yes, stocks grow and produce wealth for shareholders without paying a dividend, but that is because their ability to distribute dividends in the future is growing.
e + 1 = 0
Any computer is a server if you're brave enough.
The Permanent Portfolio will be safe enough to walk away from and forget about completely only if it allows for more than just the problems and hazards that are obvious today. It will have to allow for all of the unforeseeable events of the next 5, 10, 15, or 20 years.
User avatar
mathjak107
Executive Member
Executive Member
Posts: 2565
Joined: Fri Jun 19, 2015 2:54 am
Location: bayside queens ny
Contact:

Re: PP vs Dividend Growth Investing

Post by mathjak107 » Sun Feb 16, 2020 12:53 pm

Really ,the stocks go down because they never paid a dividend ...someone better tell Berkshire , google ,Facebook ,biogen ,Tesla ,amazon and if I had the time I would list over 70 more big names that have never paid a dividend nor intend to , that they need to go down for that reason......

I think that thinking stocks will go down who don’t pay dividends is a poor assumption....you can’t generalize about this , it is going to be an individual case
User avatar
Smith1776
Executive Member
Executive Member
Posts: 888
Joined: Fri Apr 21, 2017 6:01 pm

Re: PP vs Dividend Growth Investing

Post by Smith1776 » Sun Feb 16, 2020 3:46 pm

You are misconstruing what I said.

If a stock doesn't pay a dividend, the market values the stock based on its ability and capacity to pay dividends in the future. This is why the dividend discount model works for all firms -- even ones that don't pay a dividend. This includes the companies you mentioned like Tesla and Facebook.

If the market judges that the prospect of future dividends has diminished or is in jeopardy, then all other things being equal, the price will go down.

The dividend discount model is a robust mathematical framework, and is taught in every finance class in the world for stock valuation. If the firm never makes a cash distribution, then the numerator in each term of the equation below would be zero. Then the firm value would come out to be zero. There must be either a dividend now, or the expectation of dividends in the future for stocks to have any value to investors.


iu.jpeg
iu.jpeg (35.07 KiB) Viewed 257 times
e + 1 = 0
Any computer is a server if you're brave enough.
The Permanent Portfolio will be safe enough to walk away from and forget about completely only if it allows for more than just the problems and hazards that are obvious today. It will have to allow for all of the unforeseeable events of the next 5, 10, 15, or 20 years.
User avatar
mathjak107
Executive Member
Executive Member
Posts: 2565
Joined: Fri Jun 19, 2015 2:54 am
Location: bayside queens ny
Contact:

Re: PP vs Dividend Growth Investing

Post by mathjak107 » Sun Feb 16, 2020 4:06 pm

Markets trade on fear greed and perception of future GROWTH in the real world not formulas ....the markets and growth stocks speak for themselves as they create wealth for their shareholders dividends or not..in the real world a forced withdrawal by the company of my own invested dollars which is what that payout is does not make or break a stock.

It reminds me of when people are thrilled they are getting a tax refund like it’s found money.

dividends are simply a withdrawal forced upon you by the very company you’re invested in. If you’re truly investing with a long time horizon, chances are you don’t need the dividend distribution as income monthly, quarterly, or even annually. Even if you did, you could simply withdraw what and when you wanted as discussed above.
Instead, dividend distributions force you to withdraw money at regular intervals regardless of whether or not you want to. This can be particularly problematic if you are purposely trying to keep your taxable income low in a specific year.

Buffett says it best

Paying dividends may not always be the best option. In fact paying no dividend could even have a positive impact on the fortunes of companies like Coke. Buffett says, "If Coke had paid no dividends, and simply repurchased shares and developed the bottling system, the shareholders probably would have been even better off...And that's true for Gillette and Disney"


https://www.valueresearchonline.com/sto ... investors/
User avatar
vnatale
Executive Member
Executive Member
Posts: 1903
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: PP vs Dividend Growth Investing

Post by vnatale » Sun Feb 16, 2020 4:47 pm

mathjak107 wrote:
Sun Feb 16, 2020 4:06 pm
Markets trade on fear greed and perception of future GROWTH in the real world not formulas ....the markets and growth stocks speak for themselves as they create wealth for their shareholders dividends or not..in the real world a forced withdrawal by the company of my own invested dollars which is what that payout is does not make or break a stock.

It reminds me of when people are thrilled they are getting a tax refund like it’s found money.

dividends are simply a withdrawal forced upon you by the very company you’re invested in. If you’re truly investing with a long time horizon, chances are you don’t need the dividend distribution as income monthly, quarterly, or even annually. Even if you did, you could simply withdraw what and when you wanted as discussed above.
Instead, dividend distributions force you to withdraw money at regular intervals regardless of whether or not you want to. This can be particularly problematic if you are purposely trying to keep your taxable income low in a specific year.
This seems to be one of those debates - abortion, death penalty, slavery, gun ownership - wherein one firmly falls into one camp or the other.

I'm definitely with Mathjak in his camp.

Companies create perceived value. They can pay out some of this increased value along the way in the form of dividends. Or, it can retain it all and you get all its value either when the company ends or you sell your investment in it.

The problem with the dividends is that they are at the company's choosing and timing and they cause a taxable event for you and, a short-term one at that.

If you really desire the cash amounts that those dividends provided then you can create your own "dividends" by selling an equivalent amount of stock. You'll also have a taxable event but a) it will only be on the gain portion of that "dividend" and b) you can also time it so it is taxed at long-term rates.

We'll see if Mathjak agrees with another simple example of mine.

A private company goes public and has a $200 million valuation. You bought 1% of it, thereby investing $2 million.

For ten years its valuation is flat. You sell and get back your $2 million.

Now assume that the company had paid out 10% of its valuation in the form of dividends. So you were paid $200,000 ( along with everyone else).

Now again assume valuation is flat except it has to take into account the dividends that were paid out.

Therefore, the company is now valued at $180 million and you only get back $1.8 million. Add back those $200,000 in dividends and it is equivalent to the $2,000,000 no dividend scenario.

Vinny
"I only regret that I have but one lap to give to my cats."
User avatar
mathjak107
Executive Member
Executive Member
Posts: 2565
Joined: Fri Jun 19, 2015 2:54 am
Location: bayside queens ny
Contact:

Re: PP vs Dividend Growth Investing

Post by mathjak107 » Sun Feb 16, 2020 4:53 pm

Buffett says that if you can retain the money and generate more than a dollars worth of value than dividends should not be paid out ..

The test
Should a company go in for dividend distribution? Buffett says, "The test on dividends is, 'can you create more than one dollar of value with the one you retain?'...If we do that, taxable or not, they are better off if we retain money. But when the time comes that we don't think we can use money effectively, we will pay it out.


To be honest when the time comes a company can’t grow the money I invested with them ,then perhaps it is time to find an investment that can
Post Reply