PP vs Dividend Growth Investing

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Re: PP vs Dividend Growth Investing

Post by dualstow » Sun Feb 16, 2020 7:57 pm

mathjak107 wrote:
Sun Feb 16, 2020 4:53 pm

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
Seems that many companies can do both. Apple is always plowing cash into its business but it has more cash than it knows what to do with, and has been paying a dividend for a few years now. Is it a stodgy, slow-growing company? Not yet.

Amazon was probably smart to put everything back into growing the company for so many years —and, funnily enough, it did not stop the share price from defying gravity (or logic) during that time, anyway. Now, they probably have enough warehouses, and I bet they will pay a dividend by 2025.

Berkshire hasn’t made any great deals lately, but I’ll always hold the stock. I have no idea what they’re going to do, but I sincerely wish they would start paying a dividend, today.
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Re: PP vs Dividend Growth Investing

Post by Smith1776 » Sun Feb 16, 2020 8:27 pm

vnatale wrote:
Sun Feb 16, 2020 4:47 pm

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 think the real issue is that the debate in this case isn't even real. Mathjak and I are not debating. Just talking past each other.

I keep telling him that I agree that dividends are not a factor. Dividends are just payment of your own property. You can just create your own dividend by selling shares. Yet he keeps reiterating this point for some reason.

That's an entirely different topic from whether dividends are the key component in stock valuation à la the dividend discount model. They are. And every textbook used in every accredited finance class in the world says so.

Mathjak has since posted Buffett quotes that have actually supported my argument and not his.

The factor literature says that size, value, and market beta explain over 90% of the cross section of stock returns. Dividends are not a factor. Modigliani and Miller and their dividend irrelevance theorem shows that it doesn't matter how a firm is financed.

However, it is also true that dividends are the only reason why stocks are valuable to investors. The dividend discount model is a simple fact. If all the numerators in terms of the equation are zero (no dividends now and in the future), then the stock has no value. It's really that simple. There must be dividends now or the expectation they will be delivered in the future for the stock to have value.

Again, I'm simply pointing out that the dividend discount model is entirely different from the various Fama-French factor models and the M&M theory of dividend irrelevance. They are all equally valid and do not actually contradict, despite the fact that many seem to think that they do.
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Re: PP vs Dividend Growth Investing

Post by Xan » Sun Feb 16, 2020 8:46 pm

Smithy is right that there is no conflict. I think we're largely in violent agreement here. Mathjak is arguing against a straw man with the whole "but it takes money out of the company" thing. Of course it does, that's the point.

I think in the bigger picture I could have been clearer about what my position is. I've expressed opinions on different things in this thread and I think that's been confusing.

One thing I said was that I generally like dividend stocks, because paying a dividend keeps companies humble and focused on the right things. That's entirely an opinion. And it's one that can be argued against by saying it generally makes more sense to keep the money in the company. That's fine. We can agree to disagree on that, no problem. Mine is just a not-strongly-held preference. Most of the arguments Mathjak has made here are against this position, which is not what the debate has been about.

Another thing I've said is that dividends are fundamental to stocks, and that poo-pooing them entirely is a wrongheaded approach. This is the point that I've been seriously arguing for. As my examples demonstrated, and Smithy's academic research agreed with, it is a stock's theoretical ability to pay a dividend which gives it any value. Its value may go up or down based on many things, but at their core, all those other things boil down to how much value the shareholders could theoretically one day get out of the stock in the form of a dividend.

This does not mean that I'm saying that stocks that pay dividends are better stocks to own. Or that stocks that pay dividends are better-run companies. It does mean that all companies, fundamentally, whether they ever actually pay a dividend or plan to pay a dividend in the future, are valued based on how much a theoretical dividend might one day be able to be paid out.

I believe this is largely because before dividends are paid out, investors AS A WHOLE are net zero. Yes, they have shares which are worth some amount of money, which amount may go up over time. But investors AS A WHOLE cannot turn those shares into that money. They can exchange those shares with each other, swapping different amounts of money. But only a dividend can actually make the investors AS A WHOLE positive in dollars for holding the stock. (Or a stock buyback, I suppose, which is basically a dividend.)

Mathjak will say "I've made lots of money buying and selling stocks with no dividend involved!" Yes. But you're up by exactly the amount that somebody else is down, in terms of actual realized dollars. So investors AS A WHOLE are still net zero.

This does not mean that more companies should pay dividends. It does not mean that you can't "make your own dividend" by selling shares. Mathjak is right about all those things, and nobody has been saying he isn't.

mathjak107 wrote:
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.
I think that's exactly the right way to look at it. If a company chooses not to pay dividends, it does so in order that when the time comes that it can pay out a bigger dividend. That time may "never" come. But all the value of the stock is based on what the size of the dividend may be in the future.

This is different from gold: gold is money, a store of value, a medium of exchange. Yes, it doesn't pay a dividend. We do hold it knowing that it's zero sum.

Stocks are different: the point of a business (and I think it's all too easy for us to forget that these are just businesses, often very big business with complicated financials) is to take in more money than it spends so that money can be distributed to stockholders. That is the one and only point of a business.

People might own the business for whatever reason, but fundamentally that reason, whatever it is, MUST boil down to at least the theoretical potential for a dividend.
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Re: PP vs Dividend Growth Investing

Post by Smith1776 » Sun Feb 16, 2020 9:00 pm

Some really excellent points, Xan. I couldn't have said it better myself.

While we are on the topic of Buffett and dividends, it may be worth mentioning that in his 1992 shareholder letter, he advocated a particular method of stock valuation created by John Burr Williams in his book The Theory of Investment Value. (https://www.berkshirehathaway.com/letters/1992.html)
In The Theory of Investment Value, written over 50 years ago, John Burr Williams set forth the equation for value, which we
condense here: The value of any stock, bond or business today is determined by the cash inflows and outflows - discounted at an appropriate interest rate - that can be expected to occur during the remaining life of the asset. Note that the formula is the same for stocks as for bonds.

-Warren Buffett, 1992

That equation and modelling he's referring to? That's the dividend discount model! I happen to have a copy of the book myself.

ddm.png
ddm.png (561.84 KiB) Viewed 278 times

Again, no dividends. No value. 8)
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Re: PP vs Dividend Growth Investing

Post by vnatale » Sun Feb 16, 2020 9:40 pm

Smith1776 wrote:
Sun Feb 16, 2020 9:00 pm
Some really excellent points, Xan. I couldn't have said it better myself.

While we are on the topic of Buffett and dividends, it may be worth mentioning that in his 1992 shareholder letter, he advocated a particular method of stock valuation created by John Burr Williams in his book The Theory of Investment Value. (https://www.berkshirehathaway.com/letters/1992.html)
In The Theory of Investment Value, written over 50 years ago, John Burr Williams set forth the equation for value, which we
condense here: The value of any stock, bond or business today is determined by the cash inflows and outflows - discounted at an appropriate interest rate - that can be expected to occur during the remaining life of the asset. Note that the formula is the same for stocks as for bonds.

-Warren Buffett, 1992

That equation and modelling he's referring to? That's the dividend discount model! I happen to have a copy of the book myself.


ddm.png


Again, no dividends. No value. 8)
Are we saying that Venture Capitalists are a special class of investors and that the formulas you have given us do not apply to them? I'm sure we'd all be in agreement that Venture Capitalists are not at all interested in dividends, invest in many companies knowing that the majority of them are going to give them a negative return, in the hopes of investing in a few that gives them a 10X return in a relatively short period of time?

I don't think anyone here will dispute what I just wrote above?

Then it comes down to how many investors at our level are "venture capital" type investors versus being "dividend" investors or even a combination - venture capital & dividend investors?

I'd then argue for those in the first category the formulas do not apply. They are not expecting nor desiring any dividends. They want to make an investment whether for a day, a week, a month, a year, or years that will give them a healthy return on their initial investment.

And, I don't think Harry Browne would call them investors. He'd probably label them as speculators? If so, what percentage of all investors fall into which category? "Investors" or "speculators".

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Re: PP vs Dividend Growth Investing

Post by Smith1776 » Sun Feb 16, 2020 9:52 pm

vnatale wrote:
Sun Feb 16, 2020 9:40 pm

Are we saying that Venture Capitalists are a special class of investors and that the formulas you have given us do not apply to them? I'm sure we'd all be in agreement that Venture Capitalists are not at all interested in dividends, invest in many companies knowing that the majority of them are going to give them a negative return, in the hopes of investing in a few that gives them a 10X return in a relatively short period of time?

I don't think anyone here will dispute what I just wrote above?

Then it comes down to how many investors at our level are "venture capital" type investors versus being "dividend" investors or even a combination - venture capital & dividend investors?

I'd then argue for those in the first category the formulas do not apply. They are not expecting nor desiring any dividends. They want to make an investment whether for a day, a week, a month, a year, or years that will give them a healthy return on their initial investment.

And, I don't think Harry Browne would call them investors. He'd probably label them as speculators? If so, what percentage of all investors fall into which category? "Investors" or "speculators".

Vinny
Some compelling thoughts, Vinny. My take is that the same dividend discount model logic still applies to firms that are at the VC stage, and even the VC investors themselves.

A VC investor may not be interested in dividends. As you say, he may want to see a 10x increase in the capital value he has placed in his chosen firm and then cash out.

But what makes it so that the firm multiplies its value by 10x? Same as any other company: its ability to pay dividends in the future must have increased commensurately.

I don't think it's fundamentally any different from a publicly traded stock that doesn't pay a dividend. It's still valuable (and potentially increasing in value) because the of the expectation of future dividends.
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Anything 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.
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Re: PP vs Dividend Growth Investing

Post by Xan » Sun Feb 16, 2020 10:04 pm

Also, don't forget that the VC has to find a buyer for the 10x appreciated stock. Why would a buyer think the stock is worth that much?

Remembering that somebody is on the other side of every trade is a big part of keeping all this straight, I think. Prices aren't just "what the stock is worth" in a vacuum: they're nothing other than what somebody else is willing to pay. Keeping this straight is what makes it clear that investors overall are net zero before dividends. And it makes it clear that the only reason a VC (or anybody) can sell stock at a gain is because somebody ELSE has high expectations of it.
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Re: PP vs Dividend Growth Investing

Post by mathjak107 » Mon Feb 17, 2020 3:32 am

Remember , at the end of the day markets trade on greed ,fear and perception.... after the Great Depression there was a new mindset ...investors liked companies that returned investors money because it was perceived as a show of health for that company .

It said look at me , I have money I don’t even need , so here take some of your money back ..

So there was a perception that these companies were some how financially healthier ..of course in reality once a company paid a dividend it was suicide to try to stop , even with one foot in the blue chip grave yard ...many blue chips kept paying right up until they were buried .

So the crux is that a company doing well financially is perceived to have money they don’t need and while they could pay out that unneeded money they may choose not to .but their financial well being is judged by the fact they could if they wanted to .

So companies don’t actually have to pay out ever , they only need to demonstrate they could pay out .

It reminds me of us guys when we first became of clubbing age ...we were on the hunt for girls ....it was the thrill of the hunt that was the fun ...when we met someone and we knew we could score , that was the biggest thrill of the hunt ...we did not even have to actually have sex , but the mere fact we knew we could if we wanted to was 90% of the game .


So perception is a huge part of compounding our dollars , not whether those dollars actually ever need to be paid out , just the fact the company is doing well enough that they could pay out is all it takes ..
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Re: PP vs Dividend Growth Investing

Post by Xan » Mon Feb 17, 2020 7:08 am

So now you agree that the potential for a dividend payout is the foundation of a stock's value? Do you also now agree that investors as a whole are net zero (or slightly negative) in dollars until a dividend is paid?

I certainly disagree that it's a matter of perception. And do you really believe that the idea of shareholders receiving profits from owning a company was invented after the Depression? That's a real laugher, isn't it?
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Re: PP vs Dividend Growth Investing

Post by mathjak107 » Mon Feb 17, 2020 7:54 am

Being able to afford to pay out a dividend vs what was said about a stock that does not pay a dividend will fall and is useless is a world of difference .

Of course I want a financially healthy company if I own a stock long term but whether they pay a dividend or not is irrelevant ..they just need to be in strong shape so they could if they ever wanted ..but either way I couldn’t care less if they did or not.

I can afford to buy a rolls at this point of my life ..but I never will ...that does not make me any poorer or make me worth less because I don’t flaunt my money or show the things it buys ....as long as the company is compounding my money and is financially healthy how I take draws from that company is irrelevant. Whether forced to take that draw via dividend or voluntary on my own is not something that matters except in tax planning ....if I don’t need the cash flow I want them to grow all my money.

If they can’t meet my expectations on all the money I invested then I may rethink that investment.

In the mean time all my money is in funds and etfs ....they all pay 2% or so in dividends or less ...all growth is really share appreciation as well as all the underlying asset growth is mostly share appreciation.most of the s& p is in the 1-2% dividend range.

Today the dividend portion of a stocks total return is at one of its lowest points because share appreciation has accounted for the biggest portion of roi to investors
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Re: PP vs Dividend Growth Investing

Post by Xan » Mon Feb 17, 2020 8:28 am

mathjak107 wrote:
Mon Feb 17, 2020 7:54 am
Being able to afford to pay out a dividend vs what was said about a stock that does not pay a dividend will fall and is useless is a world of difference .
Is that what you've been arguing against? It's a figment of your imagination. I never said anything like that.

But it is true that the only way stocks give money to their investors as a whole is through dividends.
mathjak107 wrote:
Mon Feb 17, 2020 7:54 am
If they can't meet my expectations on all the money I invested then I may rethink that investment.
But when you divest, the investment doesn't disappear. It just goes to someone else, zero-sum style.
mathjak107 wrote:
Mon Feb 17, 2020 7:54 am
Today the dividend portion of a stocks total return is at one of its lowest points because share appreciation has accounted for the biggest portion of roi to investors
The overall, realized ROI to investors without dividends is zero.
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Re: PP vs Dividend Growth Investing

Post by mathjak107 » Mon Feb 17, 2020 8:34 am

Again I have to disagree with everything you just posted .... so my growth funds that have near zero dividend yield which have appreciated tremendously over the years have near zero roi ?... does that even make sense .....my return on investment has nothing to do with taking a draw or not .

My roi is only dependent on the companies doing well , increasing their value ...they may have the ability to pay a dividend but
If they never do it is irrelevant my roi is my roi ...I make money when I sell based on share price because of market fear ,greed and perception of everything known about that company and its competitors.

A zero sum game is having a loser for every winner ... stocks are never a zero sum game ....we can all be winners ..you are mis-using a term .

And so we go round and round
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