Dec 22, 2011 132 comments

Guest Posting from Dividend Mantra : What is Dividend Growth Investing?

Hello everyone. MMM here.

Over the next few weeks, we shall dive into the exciting field of Dividends – the magical stream of free money that companies pay you just for owning their stocks.

In simpler times (i.e., those before 1960), this stream of dividends was the primary reason anyone would even consider owning something as risky as stocks. In the most recent half century, however, stock investing has become more popular and a mania has sprung up around it. This has driven up share prices when measured against the underlying earnings of the companies, and it has spawned a whole legion of market timing and momentum-based trading that attempts to predict the immediate future of stock prices based on recent fluctuations in those same prices.

The more I read about investing, the more I am convinced that buying boring but successful old companies with high earnings, high dividends, and low share prices (exactly what Warren Buffett has done for decades to become the richest investor in the world), is the best way to be a successful investor. Buying index funds indirectly accomplishes this, since there are plenty of boring old companies mixed into the S&P500 index, but for a purer and more advanced form of seeking out higher income, dividend-specific investment is a field to look into.

Academic studies of stock market performance strongly suggest that if there is any way to beat the returns of the overall stock market on a risk-adjusted basis, it is by buying stocks with high dividend yields and a low price-to-earnings ratio – also known as Value investing.

And from an early retirement perspective, retiring based on a diversified stream of dividends, rather than a fluctuating set of share prices, leads to a much less volatile financial life. When the stock market dropped by over 50% around 2008, retirees living off of their dividends barely noticed, since the underlying companies barely cut their dividend payouts during that time.

As the final icing on the cake, dividend earnings typically increase along with inflation over time, making them a much more viable source of lifetime income than a mattress stuffed with cash or a savings account earning 1% interest.

We’ll open the series with this guest posting from a guy who goes by the name Dividend Mantra. You can learn more about his philosophy by reviewing all his archives at dividendmantra.com.

What is Dividend Growth Investing?

MMM was kind enough to invite me to do a guest post introducing some of his loyal readers to dividend growth investing and some of the basic fundamentals behind this investment strategy. I’m not going to get too crazy with numbers and ratios, but instead I’m going to focus on the qualitative nature of this investment strategy.

A Little About Me

First, a little background on yours truly. I was born in 1982 and got serious about saving, living frugally and investing in mid-2010. It was when I found out that my net worth was negative and I’d be likely working until I was dead that I decided to change my ways. I read a fantastic book, titled Your Money Or Your Life, and this definitely transformed my relationship with money and the way I looked at work, money, consumption and time. I decided that the limited time that I’m given here on Earth should be used how I see fit, and not in exchange for bigger and better objects in an endless pursuit of the enigmatic Mr. and Mrs. Jones.

I now save well over 50% of my net income and invest that excess capital into dividend growth stocks. Although I highly recommend diversifying your capital into multiple investments, I’m going to just concentrate on stocks today as that is primarily where my net worth lies currently.

Simpler Than You Think

Dividend growth investing is a strategy of investing whereby an individual engages in long-term investments with quality businesses that are expected to grow revenues, earnings and dividends over a long period of time by selling/manufacturing/distributing products that people want or need every single day. These investments are made by purchasing common stocks of these businesses that pay quarterly, semi-annual or annual dividends to shareholders. These companies typically have a long-term successful track record already behind them. Examples of these businesses include Coca-Cola, Wal-Mart, Colgate-Palmolive and ConocoPhillips. These businesses are all generally household brand names that produce quality products that people want and need. I try to invest in companies that I use every day. Although I’m significantly frugal, I still drink Coke, I brush my teeth with brand name toothpaste because I trust it, and I shop at major retailers like Wal-Mart because they’re convenient, cheap and usually centrally located along a bus line. Speaking of the bus, it runs on gas…which is refined from oil. Although I don’t own a car, I still have an indirect need for oil which is where investments in quality, large international oil producers like ConocoPhillips come into view.

Concentrate On Value, Quality And An Economic Moat

Although money managers and brokers want you to believe that investing in the stock market is incredibly difficult, it’s really not. Notice I used the word “investing” in the preceding sentence. Long-term investing in the stock market is an incredibly efficient way to build wealth for a patient and focused individual. People who trade in and out, hopping from one investment to another are simply transferring their wealth from their wallet to the brokers that facilitate trades. That is not investing; that is betting.

Concentrate on value. Any object or service in the world has a price and a value behind it. Price is what you pay, but value is what you receive. It’s no different with stocks. Paying a premium for a quality business will always be better than getting a “steal” on a stock with a lousy underlying business. I typically try to invest in quality companies that have a price to earnings ratio (the price you’re paying for the earnings of the business) of less than 20, and preferably less than 15. With a price to earnings ratio of 20, that means I’m paying $20 for every $1 of earnings. A lower valuation, and consequently a lower p/e ratio, means that investors are expecting lower growth going forward. It’s important to realize that the market isn’t always correct and it’s key to capitalize on businesses that are high quality and trading for a cheap price. At that point, you’re getting great value for a cheap price.

Concentrate on quality. Recognizing quality is key for a successful investor. Quality is usually backed by a consistent product with a brand name that people are usually willing to pay a premium for. Again, going back to my Coca-Cola example, I’m willing (even as frugal as I am) to pay a premium for Coca-Cola over store-brand cola because to me it tastes better. I’m certainly not alone, because Coca-Cola sold over $35 billion worth of products last year. If you want to commit money to an investment it’s probably a good idea to try the product if it’s applicable. Want to invest in McDonald’s? It’s easy to check out a couple different locations and see if they’re busy, serving a consistent product, clean and offering efficient, quality service. This isn’t always applicable to an investment, but if it’s available to you it’s a good idea to see the company behind the stock. The key is doing your research and discerning quality.

Concentrate on companies with an economic moat. An economic moat is a competitive advantage that a business has that prevents other businesses from infringing on its market share. Companies that have pricing power, economies of scale, brand names, large distribution networks and barriers to entry have economic moats. Think of a company like a castle. The larger the moat around that company, the better defense it has against outside forces (competing companies). Coca-Cola has a large economic moat because of its global footprint, large brand name exposure, quality of product and economies of scale through volume and distribution. These aspects of Coke’s business are extremely attractive and that’s why Coca-Cola usually sells for a premium over its competitors. They have a majority piece of the market share in almost every market they compete in. That provides an investor peace of mind and the odds are strong that this company will be able to continue to boost earnings and dividends for many years to come. Do you ever see those old ads for 5 cent Coke bottles? They don’t sell for that anymore. That’s called pricing power. This is important, as a dividend growth investor is looking for dividends that grow at a rate that exceeds inflation. Growing dividends come from growing earnings and cash flow. You can’t increase earnings if you don’t have pricing power.

My Strategy

I personally invest the majority of my net income into quality dividend growth stocks every single month. This is a form of cost averaging for me, as I do not believe in timing the market. Some months the market is down, and some months it’s up. I try to buy on dips within each month. I try to commit at least $1,200 to each transaction, so as to limit the effect of broker fees. I use Scottrade, and they currently charge $7 per transaction. I use income from my paycheck and combine it with dividends received from the prior month and used that combined capital to purchase shares in quality businesses. For instance, earlier this month I purchased 35 shares of Illinois Tool Works (ITW) at 46.68 per share, 30 shares of Emerson Electric (EMR) at $50.88 per share and 50 shares of AT&T (T) at $28.87 per share. My ultimate goal is to produce a passive stream of income from dividends that exceed my expenses, thereby rendering me financially independent. My expenses currently hover the $1,100 mark per month. I expect my dividends to exceed my expenses before my 40th birthday.

For beginners I would recommend building a core portfolio around large dividend growth businesses like Procter & Gamble, Coca-Cola, Pepsi-Co, McDonald’s, Wal-Mart, Johnson & Johnson and similar companies. These are typically consumer based stocks that aren’t as hard-hit when economic dips occur. Once you have your core portfolio built, you can branch out into companies in other sectors that still produce quality products and have a long-term track record of raising dividends and earnings at a rate that exceeds inflation. Companies like Exxon Mobil, Intel, General Dynamics, Illinois Tool Works, Medtronic and Visa come to mind here.

In Conclusion

I didn’t want to get too detailed with numbers, ratios, balance sheets, cash flow statements and the like. I wanted this to be a basic primer on dividend growth investing and I want prospective investors to always remember the basics. When you’re looking at stocks, you’re looking at owning a piece of a company that produces something of value. If you don’t personally see how that value translates to long-term growth then it’s probably a good idea to invest your money elsewhere.

Full Disclosure: I’m long ITW, EMR, T, XOM, INTC, GD, MDT, PG, KO, PEP, JNJ, WMT, MCD, COP.

Thanks for reading!
Dividend Mantra

Update from MMM : This fantastic guest posting ended up sparking a huge and somewhat unruly discussion in the comments. Experienced stock investors may enjoy reading through, while beginners might end up more confused than when they started.

Writer J.L. Collins took the time to make a nice summary of the arguments with a clear summary here: http://jlcollinsnh.wordpress.com/2011/12/27/dividend-growth-investing/

Future tip: the comments section of this blog doesn’t work for big discussions longer than about 10 exchanges. Every opinion is welcome, but if you ever get riled up and want to take it outside, why not head over to the Reddit Financialindependence section and spark one up there? Lots more fun and more wise people to weigh in. Then post a link to your new thread in the comments section here.

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Want More?

Executioner December 22, 2011, 6:38 am

Nice intro. I’d be interested in seeing future entries on this topic.
Matt from Buffalo December 22, 2011, 6:59 am

Nice topic.

DM/MMM, what is your view on the “Dogs of the Dow” strategy? Jacob brought it up in his guide to investing, and it seems interesting to me. This article seems to reinforce that position. Thoughts?
- Dividend Mantra December 22, 2011, 5:23 pm
  
  Matt from Buffalo,
  
  It’s a fair enough strategy, but it strives for yield over fundamentals. It’s heavy on telecoms for instance (VZ and T) and also includes stocks that don’t grow dividends. It could be great for someone who’s looking for very passive investing with a yearly rebalance. For someone who’s a bit more hands-on and looking to buy on value, fundamentals, rising earnings, quality products I think one can do significantly better than the Dogs over the long-term.
  - Dan December 22, 2011, 5:55 pm
    
    Almost by definition, focusing on dividend stocks also strives for yield over fundamentals. Don’t exclude low and no dividend stocks from your investing strategy, as they can often have superior fundamentals- with better tax efficiency to boot (and thus more money in your pocket)!
    - Dividend Mantra December 22, 2011, 6:23 pm
      
      Dan,
      
      I disagree that dividend growth investing focuses on yield over fundamentals. If that were the case I’d have my entire portfolio invested in MLP’s and mREIT’s like NLY, KMP, AGNC and the rest. Some of those yield WELL over 10%. Instead, my portfolio is focused on stocks that I mentioned in the article that typically yield less than 4%.
      
      Dividend growth investing focuses on fundamentals first and foremost, because without fundamentals the dividend cannot be paid.
      
      Take care!
      - Dan December 22, 2011, 6:29 pm
        
        Most of the examples you just cited aren’t true yields- a lot of those “yields” are actually return of capital.
        
        Anyway, my point is that you should diversify and not focus on just one subset of investing. Even if you want to focus on that subset (the apparent belief that you can beat a widely diversified index through your own flavor of fundamental analysis), that in no way restricts you to dividend paying stocks. Indeed, your analyses should show you the benefit of avoiding mandatory income recognition.
Chris December 22, 2011, 8:04 am

Great Job! I’ve got a chunk of money I’ve been looking to invest, so this article was right up my alley. I like the idea of investing in dividend paying funds that will eventually provide an income stream to pay the monthly bills-genius. Keep ’em coming, I’d love to see more essays on folks who’ve done this and continue to hear the pros and cons.

BTW, congrats Dividend Mantra on starting a new path recently!
- Dividend Mantra December 22, 2011, 5:23 pm
  
  Chris,
  
  Thanks for the congrats!
  
  I am also looking forward to MMM’s continuation of this series.
  
  Best wishes!
John Cheever December 22, 2011, 8:28 am

If you want to invest in companies that have dividends I would suggest looking into the “Dividend Aristocrats” which are companies that have increased dividends every year for at least 25 consecutive years. There are even ETFs to make investing in them easy so you could dump cash into them on a monthly basis completely automatic.
- Dividend Mantra December 22, 2011, 5:28 pm
  
  John Cheever,
  
  Thanks for adding that. The Aristocrats list is a wonderful list that includes large-cap companies that have raised dividends for at least 25 years in a row. I don’t think it’s a complete list, but rather a starting point for further research. There are a lot of smaller companies, or companies that have raised dividends for 5-24 years in a row that are poised to be the next “Aristocrat”. Most dividend growth investors are always looking for that company, as getting on that train early is the best way to enjoy the view!
  
  David Fish’s CCC document is a fine resource for these companies.
  
  http://www.dripinvesting.org/Tools/Tools.asp
  
  Open the excel or pdf file on the top left.
  
  Take care!
Jackson December 22, 2011, 9:31 am

Dividend Mantra, so how much money would you need invested in dividend stocks before the dividends equal $1,100 per month?
- No Name Guy December 22, 2011, 9:48 am
  
  Depends on the yield. Jacob at ERE (I believe) uses the 400:1 ratio for invested assets to monthly income (which implies a yield of 3%). $400 invested @ 3% yield produces $12 / year or $1 month.
  
  So using the mentioned expense level of $1100 / month, that would be $1100 x 400 = $440,000.
  
  Of course, if you can increase the yield, say to 4%, you only need $300 invested per dollar of monthly income desired, in that case the math would work out to be $1100 month x 300 = $330,000 invested.
  - Dividend Mantra December 22, 2011, 5:31 pm
    
    No Name Guy,
    
    Thanks for adding that. Your math is correct. I generally target $300k+ before I would consider myself financially independent. Your $330k on a 4% SWR (safe withdrawal rate) is correct math based on my expenses. I generally use a 4% SWR when calculating income.
    
    I’m also open minded to retiring outside the U.S. (SE Asia?) and also open minded to doing part-time work as I generally doubt that I won’t earn another dollar for the rest of my life outside of dividends after I turn 40. I think there is always opportunities for some kind of income if you want it.
    
    Thanks!
    - Jason December 26, 2011, 1:26 pm
      
      Dividend Mantra and others interested,
      My style of investing and capital amounts are very similar to yours. The only additional advice I’d like to offer you is Sharebuilder. I’ve recently transferred my accounts over to Sharebuilder because they automatically invest the dividends for free (including partial shares), and you can also initiate (schedule) automatic trades which reduces your cost of the trade ranging from $1 to $4 depending on the program of your choice.
      
      Additionally, because great company dividends grow faster than inflation (and often 10% to 25% annually) over many years…you may find that you’ll reach your dividend income stream faster than forecasted with the auto dividend investment approach.
      
      Cheers!
      
      Jason
      - Dividend Mantra December 26, 2011, 8:54 pm
        
        Jason,
        
        Thanks for adding that!
        
        I have looked into Sharebuilder before. If I remember correctly, do get that reduced commission rate you have to buy on certain days, correct? I could be wrong on that, as it was some time ago that I looked into it.
        
        I currently use Scottrade, and they charge a $7 commission charge for each transaction. It’s not the cheapest around, which is why I try to keep transactions as high as possible in terms of dollar amounts.
        
        Thanks for that. I’ll have to look into it a bit more.
        
        Best wishes!
Lee Lau December 22, 2011, 9:52 am

Maybe a natural continuation to this article but another strategy I (and many others have been using) is to sell call options referencing the very same dividend producing stocks that one owns. Since the call options are “covered” the risk is limited and produces another nice income stream on top of the very same income stream.
- Dan December 22, 2011, 12:56 pm
  
  Lee lau, writing covered calls is pretty inane. Check this out:
  
  “This business of buying stocks and then writing options against them goes by the names “buy-write” and “covered call.” It has been around for a while. It has beguiled many a retail investor and a fair number of billion-dollar pension funds that ought to know better.
  
  There is, of course, a catch. In bear markets option writers do badly, because the option income cushions only some of the blow. In bull markets the option writers don’t recover the lost ground because they have given away much of their capital gains.
  
  Over time, option writing is neither a winning nor a losing strategy, at least if you ignore the considerable transaction costs. Options are fairly priced. Arbitragers see to that.”
  
  http://www.forbes.com/sites/baldwin/2011/11/02/getting-rich-off-options/
poorplayer December 22, 2011, 10:15 am

This is a very clear, concise, well-written introduction to dividend investing. Thanks for writing this. I am sure many people will get a very good picture about the process from this.

However, I feel I have to throw this out for consideration, and that is the social consciousness factor involved in directly investing in these companies. MMM readers are no doubt smart enough and aware enough to know where I am going with this argument, since they are dedicated to a lifestyle of frugal living and rejecting foolish consumerism. For example, if you believe in healthy eating and a nourishing diet for you and your children, why would you invest in Coca-Cola, which is dedicated to getting children in particular to drink their product by making sure it’s available in schools and any other venue where children are present worldwide? If you are trying to minimize the use of your car in order to save money and preserve the environment, why would you invest in Exxon/Mobil, a company dedicated to keeping you and the rest of the world hooked on fossil fuel? If you believe in worker rights, why would you invest in Wal-Mart, a company notorious and well-documented for treating its workers poorly?

Thankfully, there are options. You can start here to get a primer on socially conscious investing, and you can investigate companies such as Atlantic Financial. A quick Google search on the term “socially conscious investing” will yield more information.

I realize there is no such thing as purity in investing in anything today, be it mutual funds or dividend investing. I am sure my retirement portfolio has shares in companies I do not like. To me, this has been the greatest and most single overlooked aspect of the entire concept of “retirement,” as society moved from the fixed pension plan to the 401K model. Pension plans in general worked a lot like social security, in that the contributions/taxes from younger workers supported people on pensions. Big business saw the benefit to themselves of creating the 401K model so as to snatch more funds from workers’ pockets to grow their companies and further put us into their thrall. Like it or not, when investing directly into stocks to acquire dividends, you are giving corporations more money, and by extension more power, to continue their rapacious business practices.

I do not write this to discourage people from dividend investing – that is a very individual, personal choice. But I do think this aspect of the process needs to be brought to light so that people can make informed choices. I am sure Dividend Mantra will be able to articulate a counter argument, which I encourage him to do, so as to further inform and enlighten the good people who read the MMM blog.
- MMM December 22, 2011, 5:28 pm
  
  Socially conscious investing is a good thing, and I have no words of scorn for those who pursue it. I did read an economic analysis once that showed that targeting your investment dollars has a much smaller effect than targeting your spending dollars (especially the ones going to charities as Dan O points out in another comment) – and your political votes and social organizing efforts.
  
  So in theory, if Exxon was paying 4% dividends, and Socially Responsible Inc was only paying 2%, you’d be better off taking the 4%, using 2% or more for your own living expenses, and the remainder for charity or other social change (if the economic analysis was correct, that is. Searching around right now, I can’t find where I read that at the moment).
- Dividend Mantra December 22, 2011, 5:40 pm
  
  poorplayer,
  
  Thanks for adding that.
  
  I guess it comes down a little to the “guns don’t kill people, people kill people” argument. Coke only makes products. It’s up to people to purchase them and consume them. It is not my decision for people to use oil, colas, tobacco, fattening foods, etc. If they do make those decisions, then so be it and I will profit by investing in companies that produce products to fill that need.
  
  Humanity, for as long as it has existed, has become exceedingly skilled at making decisions that either hurt oneself or others. War, destruction, consumption, and desecration have all existed for centuries. I invest in defense companies and people question that. I’m sorry, but people were using bows and arrows before missiles. And they’ll be using weapons far into the future. I’d love it if the world were one harmonious place where we all hug and sing (not to sound sarcastic), but it’s simply not true. I’m a realist and I’ll invest in the companies you mentioned for as long as people want to continue buying their products.
  
  On a separate note, I’d love to find a company that does “no wrong”. You could nitpick and find something wrong with just about any company out there. You know why? Because they are run by people. And people are, unfortunately, prone to bad decisions.
  
  I didn’t mean to sound rude or sarcastic, as that is simply not my style. But humans, and consequently, companies are imperfect. I try to look at the upside.
  
  Best wishes!
  - poorplayer December 22, 2011, 10:44 pm
    
    DM,
    
    You’re welcome. Thanks for responding. Your argument has merit, but I see the problem in a different light.
    
    One difficulty with your argument, from my point of view, is that you believe Coca-Cola “only makes a product” and then benignly sits back and lets consumers choose to consume the product or not. You seem to be suggesting that it is only the consumers who make these “bad decisions” – never the companies. This, in my opinion, is a naive viewpoint at best, and employs the old “blaming the victim” mentality. Corruption, violence, bribery, and mass marketing and persuasion, especially in third world countries, are the order of the day and standard operating procedure for multinational corporations, and have been since the times of the robber barons in this country. This is well-documented since the days of Upton Sinclair. And it is all done under the principle that the only responsibility of a corporation is to maximize profit, increase market share, and increase shareholder value. All you need do to understand where I am coming from is read up on the history of the tobacco industry in this country and how they manipulated, lied, withheld research, and in general, as a corporation, engaged in unscrupulous and illegal ways to keep Americans addicted to cigarettes.
    
    I am in complete agreement with you when you say that there is no such thing as a company that does “no wrong.” You’ll note in my long post above that I said there is no such thing as purity, so I have already conceded that point. To me, however, it is a matter of scale, and a matter of intent. There is a difference between someone who tells a few white lies now and then, and a serial killer of women. It is certainly tricky to ascertain where that line exists in the world of corporate behavior. Today’s economy is so incredibly interconnected and diffuse that determining the extent of a corporation’s social responsibility is difficult for the average investor.
    
    Your argument, however, seems to be saying that as long as one can profit from the bad decisions of others (those “others” being, presumably, consumers), that’s cool – no need to determine where that line is. But it ignores the reality that there is always someone there to provoke or instigate the bad decisions people make, and make it financially rewarding to do so. War profiteering has always been pretty good for this country, of course. It lifted us out of the Great Depression, according to some historians and economists. Now that we are out of Iraq I wonder what “war” our politicians will find (or provoke) next so as to pump up defense company dividends by increasing demand for their products?
    
    I do not make this argument to dissuade you or anyone else from investing where they please. That is none of my business. But I have always believed that decisions of any type, whether about investing or buying a car or determining whom to marry, are best made when all the information is out on the table. I have only made these comments to provide MMM readers with more information and an alternative perspective to what dividend investing actually is about. Like you, I am a realist as well, but the reality of what I see does not leave much of an upside. There are, in my opinion, more humane ways to acquire financial independence than by directly investing in corporations that willfully demean people, wreck havoc on the environment, and profit on the murder and death of others.
    
    In the final analysis, I think we do not differ on the financial merits of dividend investing as such. In principle, dividend investing is a sound capitalist approach to keeping an economy strong and growing. It is more a question of what to invest in. I prefer finding companies that have a more socially responsible attitude towards capital markets and the pursuit of profit, even at a loss to myself in terms of ROI. You place no such social restraints on yourself, preferring a strict utilitarian approach to maximize ROI. So be it. Thanks for the discussion and the conversation. I look forward to gaining more insights on your techniques.
Des December 22, 2011, 11:19 am

Am I being too nitpicky to point out that you flatly say you don’t believe in market timing, and then two sentences later you say you buy on dips? If you think you can’t time the market, why are you trying to do so every month? Or, you do believe you can time the market, and limiting yourself to within the month is your failsafe?

Otherwise, great post.
- Peter December 22, 2011, 12:13 pm
  
  I wouldn’t necessarily call that market timing in today’s sense of the word. Market timing involves selling and buying constantly, trying to outsmart and beat the market. In this case, I’m sure Dividend Mantra probably spends no more then a few minutes looking at the charts of the companies he’s interested in to see if they have had a few days of rise, fall, or have stayed relatively flat. It’s a gamble but a small one because overall, he is always dollar cost averaging.
  He’s not one of the day traders looking to never take a loss and ends up selling low and buying high like too many brokers and individuals end up doing.
  Trust me, there’s a huge difference between a day trader and someone who tries to buy a bargain but stays in for the long haul regardless.
  - Dan December 22, 2011, 5:43 pm
    
    Peter, dollar cost averaging is a form of market timing (as it implies that instead of investing as soon as you have investable money, you space out your purchases over time). So is looking at any chart before deciding to buy or sell. If you decide not to buy, or you put off buying, because you don’t like today’s price- that’s an attempt to time the market.
    - Dividend Mantra December 22, 2011, 5:54 pm
      
      Dan,
      
      I completely disagree that dollar-cost-averaging could somehow be construed as timing the market.
      
      Dollar-cost-averaging is defined as:
      
      “The technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high.”
      
      If you’re purchasing stocks on the 15th of every month, because that’s when money gets funneled to your IRA or other investment account based on your payday, how is that timing the market?
      
      DCA is the antithesis of timing the market.
      
      Typically, the most common form of DCA would be an employee who automatically contributes money to his 401(k) through an employer sponsored retirement plan. These are usually people that have no active investment management strategy whatsoever.
      
      Best wishes!
      - Dan December 22, 2011, 6:04 pm
        
        Sure, if you invest right when you have the money to invest, that’s not timing. But it isn’t DCA either. DCA implies a conscious effort to average your money into the market over time. If you invest when you have the money, that isn’t averaging in- that’s jumping in, right then.
        
        Admittedly, ther is debate on DCA. The Wikipedia article highlights this: “Discussions of the problems with DCA can do a disservice to investors who confuse DCA with continuous, automatic investing. Unfortunately this confusion of terms is perpetuated by many sources discussing automatic investing (such as AARP and Motley Fool). The argued weakness of DCA arises in the context of having the option to invest a lump sum, but choosing to use DCA instead.”
        
        http://en.wikipedia.org/wiki/Dollar_cost_averaging
    - Peter December 24, 2011, 9:51 am
      
      Dan, you are absolutely right in a way. I guess I don’t see that kind of strategy as timing though in the sense it’s used today. Perhaps DM should have said he’s not into active trading based on market timing (or any kind of active trading, it seems).
      But I also agree with DM, DCA is an attempt to diffuse the effects of market timing. You accept a few less shares today for a few more shares in a week or two.
- Dividend Mantra December 22, 2011, 5:44 pm
  
  Des,
  
  Great point there.
  
  Perhaps I should note that I am in a sales position and I am paid one large check every single month, which is a commission check based on sales from the preceding month.
  
  I simply don’t think the best day to invest every single month is the day I get paid just because I happen to have capital on that day. If I get paid on the 5th, and the market is up 1,000 points should I invest simply because I don’t believe in timing the market? Of course not. I hold my cash until I think there is an opportunity in a security I’m tracking. If that position loses 5% the next day, so be it.
  
  On the other hand, I also don’t hoard cash for months on end waiting for “the perfect moment”. I invest every month, which starts the dividend compounding machine with those shares from that moment on.
  
  There have also been many months where I invest on the same day I get my large check. It all just depends on what equities I’m tracking and where I think the best upside is, relative to my other opportunities.
  
  I hope this helps!
  - Matt December 23, 2011, 8:36 am
    
    In Warren Buffet’s book ‘Snowball’ one of the first things that surprised me is that he doesn’t practice or believe in dollar cost averaging. To borrow from your comment he basically “hoards a bunch of cash for months on end and waits for “the perfect moment” and buys as much as he can”. It’s a great book, written with an amazing narrative.
    
    I may have been mistaken but that seemed to be the method he bought American Express, Geicko, and all his early investments. Even today you don’t seen him ‘trickle in’ and purchase stocks on a regular basis. He waits for turmoil to strike and buys when everyone else is panicking. Toward the end of the book he said the market was far too overvalued and that he wouldn’t even buy his own stock at these prices.
    - Chris December 23, 2011, 1:06 pm
      
      I agree, “Snowball’ was a great book. I think it was published in 2008 – and recently Berkshire announced some share re-purchases, so the “overvalued” situation seems ot have changed since the book was being written.
vwDavid December 22, 2011, 11:33 am

I highly recommend the book “single best investment” by Lowell Miller for all you MMM dividend aristocratic types.
Dan December 22, 2011, 12:42 pm

Why buy stocks (in taxable accounts) that force you to pay income taxes? If you really want to maximize your income, pursue low- to no-dividend stocks that have good low PEs, good growth prospects, and decent moats (like Intuit, AutoZone, DirecTV, etc – see Steven Baldwin’s Forbes blog). Sell shares when you need your $1.1k a month, and first sell your highest basis stocks. This way your taxable income from investments is zero for the next 10+ years you’re accumulating stocks (saving you 20%+ of the taxes you’re paying on your dividend stocks’ dividends now), and darn near zero in retirement (when you can match losses with gains). Tax loss harvesting (be sure to have $3k in losses each year now to offset ordinary income) and tax efficient investing is key to stock market investing, and high yield dividends are terrible for taxable accounts (keep them in your IRAs and 401ks only).
- Dan December 22, 2011, 12:51 pm
  
  Excuse me, his name is William Baldwin, not Steven. Here is a good article:
  
  “Cash dividends are bad. They force you to share your wealth with the IRS.”
  
  http://www.forbes.com/sites/baldwin/2010/08/25/finding-stocks-with-silent-dividends/
- Homer S December 22, 2011, 1:24 pm
  
  You have to pay fees, in addition to taxes when you sell $1,100/month. You also have to sell when you need the $, regardless of how the market is pricing your shares now. You’re also deciding to sell shares based on the cost-basis, not on what shares YOU ‘d like to keep. You’d also, eventually, run out of shares.
  - Dan December 22, 2011, 5:32 pm
    
    Homer, you don’t run out of shares. Whether you take 2% a year from your portfolio as dividends or sell 2% of the capital from “silent dividend” paying companies, you’re still equal- except in one situation you pay less or no tax (with tax loss harvesting). You also don’t lose any diversification because you can buy that same company 31 days before or after your high basis sale.
    
    Dividends suck, as they force you to recognize taxable income. In taxable accounts, better to invest in companies that do share buybacks instead of dividend payments.
    
    Losing control of the timing of dividend income (taxed at ordinary income rates, especially after Obama kills the QDI exemption) is a bad thing. Better to defer capital gains until the timing is best for your tax situation. Defer long enough and you’ll never pay tax on your appreciation (either through charitable donations or through tax-basis step-up on death).
  - Dividend Mantra December 22, 2011, 6:07 pm
    
    Homer S,
    
    A dividend growth investment strategy, when properly used, is purposeful in its attempt to make sure you don’t run out of shares. In fact, I plan to live completely off the dividend distributions and not sell any shares at all.
    
    Think of it like this:
    
    My portfolio is a tree. The individual stocks in that tree are branches. The dividends are fruit that hang off the branches. I plan on harvesting that fruit, but leaving the branches (and, hence) the tree intact.
    
    An investor who plans to live off a portfolio by selling 4% per year is basically hacking off small sections of the branches, hoping that they will regrow before they hack off a section again. This sometimes works, but other time the investor ends up hacking off too many branches and the tree willows away.
    
    Either way, best of luck to you!
    - Dan December 22, 2011, 6:18 pm
      
      Mantra, your analogy only makes sense if dividend paying stocks reliably and consistently outearn their non dividend paying cousins- which is far from the case. If I take 4% out of my portfolio each year, it makes no difference whether it came from dividends or from capital gains- they both have the same effect on my net wealth and my futur prospects (except one comes with higher taxes)!
      
      Companies that keep their money boost their share price the same amount by which you benefit if they had given that money to you as a dividend… except you pay taxes now on distributed income, and don’t necessarily have to for undistributed income.
      
      Hoping that I’m helping here- anyone see my point?
      - Dividend Mantra December 22, 2011, 6:37 pm
        
        Dan,
        
        “Mantra, your analogy only makes sense if dividend paying stocks reliably and consistently outearn their non dividend paying cousins- which is far from the case.”
        
        I think making such wide assuming statements like that are generally incorrect. There could be many dividend paying stocks that outperform or underperform non-dividend paying stocks and visa versa. I simply don’t think there’s any way to put all those stocks in one basket and compare them. These stocks are shares in individual companies all with individual assets, liabilities, cash flows, investments, employees and so on.
        
        That would be like me saying First Solar, Inc. (FSLR) and its -73% YTD performance compared to Ross Stores (ROST) with its +50.73% YTD performance proves that dividend growth stocks (ROST has grown dividends for 17 years with a 10-year dividend growth rate of 23.7%) are a better investment. This is simply comparing apples to oranges.
        
        There will always be underperformers and outperformers in any group of investments.
        
        Hope that helps.
      - Dan December 22, 2011, 6:42 pm
        
        Right- it is incorrect to say dividend paying stocks reliably outearn no dividend paying stocks. Therfore your tree branch cutting story is misleading. Taking 4% from a portfolio, whether through mandatory realized dividends, or through elected share sales, is the same! One isn’t anymore fruit bearing than the other. Except in one case, the tax man keeps a greater share of your fruit.
      - MMM December 22, 2011, 7:40 pm
        
        Dividend and Dan are both making valid points from slightly different points in the spectrum of conventional investing wisdom. I definitely suggest checking out some of the research about value stocks – which correlate with higher dividends, and align nicely with the Dogs of the Dow companies.
        
        The basic idea is that companies that are currently out of style because financial-news-headline-readers have been scared off, are often irrationally underpriced. The Efficient Market Hypothesis states that this should not happen, but the slightly outsized rewards have persisted for decades.
        
        The current growth in popularity of Dogs of the Dow and dividend investing, however, might serve at last to arbitrate away this market anomaly. We’ll see.
        
        Check out my usual suggestions: A Random Walk down Wall Street, the Little Book that Beats the Market, and The Intelligent Asset Allocator for some background on this.
        
        The last of these books makes a good point – if you are living entirely off of dividends, you can end up with a considerably HIGHER safe withdrawal rate than with a portfolio comprised of stocks that have equal fundamentals but lower dividends. This is because actual share prices fluctuate much more than dividend yields – so you will be crushed more in bear markets and eat into your principal more, in the case of bear markets appearing early on in your retirement.
        
        Finally, another point made in the “Allocator” book is this: every company eventually goes out of business. So the value of the stock price should truly be the discounted value of the eventual stream of dividends. Without eventual dividends, there is no value. Companies that keep all their money to invest in future growth, ad infinitum, tend to end up suffering from overconfidence and losing everything a little bit more than they should.Statistically (according to these books anyway), the dividend payers do offer better long-term returns than the more confident “growth” stocks.
      - Dan December 22, 2011, 8:34 pm
        
        MMM, this is precisely why we should find stocks that look like other dividend payers (consistent high free cash flow, good earnings, wide moats), but that instead of paying dividends, they do share repurchases. This way you only recognize taxable income on your own schedule, which still owning fundamentally the same kind of company.
        
        Just because a stock doesn’t have a dividend yield doesn’t mean it is not a value company. If Mantra’s argument is to essentially ignore diversification and overfocus on value companies, then by all means do so, but don’t do so by only buying high dividend yield companies – because you can get many of the same attributes from companies that allow you to be smart about the timing of tax payments.
        
        I reiterate – just because you’re not receiving dividends doesn’t mean you’re “doubling down” on the company and never benefiting from the company’s income. Sell shares when you need money, and only then. Any other transactions (whether forced on you by dividend payments, or whatever) should be minimized, in order to crank your tax efficiency dial to 11.
        
        If I may take the liberty, Mustachianism is just as much as being smart about tax expenditures as it is about any other expenditure. Reap the max benefit per dollar paid, and avoid the expenditure when you don’t really have to make it!
    - Homer S December 23, 2011, 8:37 am
      
      Mr. Mantra,
      
      My reply was to Dan. I understood your post & reply.
      
      Thanks
- George December 22, 2011, 5:26 pm
  
  @Dan – you’re incorrectly assuming that the author has enough income to be in a tax bracket where such things matter. If one is already in the 15% tax bracket, then he is already being tax efficient.
  - Dan December 22, 2011, 5:35 pm
    
    George, even in the 15% bracket, it is better to not have taxable dividend income. Better for his money to grow, untaxed, for 10+ years, than to have a chunk carved off each year. Nonsensical to pay taxes on income you don’t need (in his wealth accumulation phase).
- Dividend Mantra December 22, 2011, 5:59 pm
  
  Dan,
  
  I keep my dividend paying stocks in a taxable income because I plan to use those distributions to pay expenses by my 40th birthday. It wouldn’t make sense for me to accumulate my Freedom Fund in a tax-sheltered account if I plan on using it so early in life.
  
  The investment plan you laid out in your comment can also be a great investment strategy, but is the complete opposite to dividend growth investing.
  
  Take care!
  - Dan December 22, 2011, 6:11 pm
    
    Mantra, you can easily access non-Roth tax-deferred accounts at age 40, by electing a series of substantially equal periodic payments. And of course, Roth account contributions can be withdrawn from anytime.
    
    My point was that you can get all the same benefits that you’re describing- that is, invest in companies with good fundamentals, strong moats, growing earnings, etc- and do it in a smarter way. Focusing on just dividend paying stocks unconstructively limits your scope and hurts your wallet- putting off further your date with financial independence. just trying to help you, and other readers, out, as I know we all want that economic freedom sooner rather than later!
    - Dividend Mantra December 22, 2011, 6:29 pm
      
      Dan,
      
      You can only (currently) contribute up to $6,000 a year in an individual Roth IRA. I would blow that out in less than 3 months. You can then only withdraw your contributions and not your earnings on investments before 59 1/2.
      
      The kind of investments (in terms of dollars) I’m making now, and the type of income I’m looking to receive by my 40th birthday simply preclude a Roth in my opinion.
      
      But, I think a Roth could make a fantastic choice for someone who’s dealing with less money or looking to receive money a little later in life. It could also be a great vehicle for someone who’s looking to grow money on the side of a 401(k), taxable account or a traditional IRA. The more, the merrier!
      
      Best wishes!
      - Dan December 22, 2011, 6:39 pm
        
        Exactly why you should consider stocks that have the same fundamentals as your favored dividend paying examples, that don’t hurt you for the next 10+ years of wealth building (by forcing a tax bill each year). Dollar Tree, Zimmer Health, Waters, Fiserv- check ’em out (and more in the Baldwin article above).
        
        Believe me, we’re on the same side here- both the same age, and both want a nice nest egg ASAP. Just trying to help: crank up the dividend yields in your Roth IRA and reg 401k, and keep dividends low in your taxable accounts. And use tax loss harvesting to defer those taxes as long as possible! (even while reducing the tax on your commission income now, through $3k in losses each year)…
      - Dan December 22, 2011, 7:03 pm
        
        And for gosh sake please don’t ignore a Roth IRA entirely. If you’re in a low tax bracket now (sounds like you are with 50% of your income saved which is perhaps $2.2k/month implies income of around $50k), you should be maxing that Roth puppy out. With any luck you’ll be alive for many many years after age 59.5, so even if you don’t use the pre age 59.5 options like a SEPP election or free withdrawal of contributions, you should still have a healthy chunk of current savings using that amazing perpetual income tax shield (imagine- big dividend yields compounding for 30+ years – some of it up to 50+ years if you live to the statistical avg – never ever taxed!) Keep your highest yielders there for sure.
      - jlcollinsnh December 23, 2011, 6:39 pm
        
        Dan….
        
        once DM is actually retired would your recommendation to keep the dividend payers in the IRAs be the same?
        
        one of the problems I see in dividend dollars building in IRAs is that when the time comes to take them out they come out as ordinary income and the dividend advantaged rate is lost.
        
        perhaps upon retirement the dividend stocks, Riets and bonds belong outside the IRA?
      - Dan December 23, 2011, 7:29 pm
        
        Once the QDI special treatment of dividends is gone (prob in 2013), dividends will be treated as ordinary income. So not sure what you mean
        
        Even the QDI rate sticks around, highest yielders should always go in tax deferred accounts, even in retirement. Don’t pay taxes when you don’t have to! Keep bonds, REITs, and any other high yielder (except intl funds which should be in taxable accouns to get credit for intl tax paid) always in tax deferred accounts. Check it out: http://www.forbes.com/forbes/2011/0808/investing-william-baldwin-investment-strategies-location.html
        
        In Mantra/DM’s situation, he should be maxing out his Roths (as he’s in a low bracket now) which of course means any and all future withdrawals from those Roths are totally tax free. Further, in retirement/wealth usage mode, he should probably withdraw from his Roths dead last, only after his taxable accounts and any other non-Roth tax deferred accounts are mostly empty (or if his withdrawals from those accounts bump him above the lowest tax rate each year).
        
        Roths are amazing in that they work perpetually until death, with no mandatory withdrawal past age 70.5 like non-Roths. All your highest yielders belong there to benefit from the tax deferral for as long as you can get – maybe as long as 50 years or more!
        
        If you want to get really tax efficient, you load up your Roths with corporate high yield bonds, and keep indebted equities in your taxable account (ie stocks with 1:1 or higher debt to equity ratios). Not only do those companies with debt pay virtually no dividends, those indebted companies also have low tax expenditures themselves since their payment on interest on their debt is tax deductible to them, so as an owner you benefit, because you’re paying (indirectly, through your ownership of their income stream) a low effective tax rate on their total income.
        
        By owning the high yield corporate bonds in your Roth accounts, you get the company’s payout on those bonds, tax free. $2.5k in each of ten 1:1 debt to equity ratio companies in your regular taxable sccounts, and $25k in high yield corporate bond funds in your Roth, and voila- you effectively and economically own $50k in high earning companies that have no debt at all, yet you’ve set yourself up with fantastically reduced tax expenditures. William Baldwin explains better than I: http://www.forbes.com/forbes/2011/0926/investing-homemade-lbo-buyouts-strategies-baldwin.html
      - Dan December 23, 2011, 7:34 pm
        
        Once the QDI special treatment of dividends is gone (prob in 2013), dividends will be treated as ordinary income. So not sure what you mean
        Even the QDI rate sticks around, highest yielders should always go in tax deferred accounts, even in retirement. Don’t pay taxes when you don’t have to! Keep bonds, REITs, and any other high yielder (except intl funds which should be in taxable accouns to get credit for intl tax paid) always in tax deferred accounts. Check it out: http://www.forbes.com/forbes/2011/0808/investing-william-baldwin-investment-strategies-location.html
        In Mantra/DM’s situation, he should be maxing out his Roths (as he’s in a low bracket now) which of course means any and all future withdrawals from those Roths are totally tax free. Further, in retirement/wealth usage mode, he should probably withdraw from his Roths dead last, only after his taxable accounts and any other non-Roth tax deferred accounts are mostly empty (or if his withdrawals from those accounts bump him above the lowest tax rate each year).
        Roths are amazing in that they work perpetually until death, with no mandatory withdrawal past age 70.5 like non-Roths. All your highest yielders belong there to benefit from the tax deferral for as long as you can get – maybe as long as 50 years or more!
        If you want to get really tax efficient, you load up your Roths with corporate high yield bonds, and keep indebted equities in your taxable account (ie stocks with 1:1 or higher debt to equity ratios). Not only do those companies with debt pay virtually no dividends, those indebted companies also have low tax expenditures themselves since their payment on interest on their debt is tax deductible to them, so as an owner you benefit, because you’re paying (indirectly, through your ownership of their income stream) a low effective tax rate on their total income.
        
        (continued on next post/reply)…
      - Dan December 23, 2011, 7:35 pm
        
        (cont’d from previous reply)…
        By owning the high yield corporate bonds in your Roth accounts, you get the company’s payout on those bonds, tax free. $2.5k in each of ten 1:1 debt to equity ratio companies in your regular taxable sccounts, and $25k in high yield corporate bond funds in your Roth, and voila- you effectively and economically own $50k in high earning companies that have no debt at all, yet you’ve set yourself up with fantastically reduced tax expenditures. William Baldwin explains better than I: http://www.forbes.com/forbes/2011/0926/investing-homemade-lbo-buyouts-strategies-baldwin.html
poorplayer December 22, 2011, 1:20 pm

This is a test post. I tried posting a comment earlier but it is not appearing. Perhaps there is a word count limit?
- poorplayer December 22, 2011, 2:00 pm
  
  Take two (shortened) – while the post is excellent as a primer for dividend investing, it raises the question of socially responsible investing. If you are trying to live a frugal, equitable and healthy lifestyle, then why would you invest in companies that promote precisely the reverse? Coke pushes its unhealthy product on children in schools, Exxon/Mobil strives to keep you hooked on fossil fuel, and Wal-Mart mistreats its workers. Those interested in socially conscious investing can get a primer at Bankrate.com, and investigate companies such as Atlantic Financial for options. Google “socially responsible investing” for more options.
  - poorplayer December 22, 2011, 2:03 pm
    
    Must have had bad links in the original. And why does my gravitar sometimes show up and sometimes doesn’t?
    - MMM December 22, 2011, 5:19 pm
      
      Hey Poorplayer, thanks for the nice perspective and my apologies for the spam filter accidentally blocking your original submission – I have restored it, and you are right that it was probably the links that triggered the filter. It’s usually very good, as it catches about 30 spams a day and only incorrectly catches perhaps one comment per month. I also don’t know about the gravatar issue – I am blissfully unaware of any of the technology behind this wordpress system, as I am enjoying just being a guy who occasionally types some shit into the computer :-)
      - Dividend Mantra December 22, 2011, 6:01 pm
        
        “as I am enjoying just being a guy who occasionally types some shit into the computer :-)”
        
        Haha! That’s awesome. I need to do that a little more!
  - Dan December 22, 2011, 2:39 pm
    
    Poor player, I respect your desire to live a healthy, frugal life, as do I. But why do you disrespect other people’s desire to choose to drink Coke, buy cheap stuff from China, and burn gas? It is one thing to live by doing yourself. It is another thing to say you know better, and that WalMart shouldn’t exist.
    
    If you really believe in global equity, invest wherever you get the highest return, and use a healthy hunk of your profits to give to the poorest of the poor (through Oxfam, CARE, etc). That’ll help humanity far more than you overpaying for energy and socks.
  - Questionable Goatee December 22, 2011, 2:44 pm
    
    I agree with you completely, poorplayer, but I still think the article was both well-written and informative. Coke is probably the absolute last company I’d invest in (assassinating union leaders, buying water in politically corrupt countries and forcing the local population to buy it – or Coke – from them when it was previously free, etc.) , but I still bookmarked this post, because the message about investing in companies that create boring/stable products that people need is up my alley, and I’d like to learn more about dividends.
jlcollinsnh December 23, 2011, 9:08 am

Hi DM,

Congrats on a nicely written and well thought out post.

And congrats, too, to Dan for correctly pointing out that dividends are not the only way to withdraw cash from investments.

The most important consideration is creating and using what I call F-you Money:
http://jlcollinsnh.wordpress.com/2011/06/06/why-you-need-f-you-money/

and it seems we are all safely on that page together.

For my part, simple is better. Occum’s razor and all that.

For anyone interested in the value/dividend approach Vanguard’s VHDYX fund gets you there and currently yields 3.18%.

If you agree, as I do, with Dan that non-dividend stocks also offer value (of a different sort) Vanguard’s VTSAX gets you both and yields 2.01%.

Once you enter in to selecting individual stocks you have taken on a complex and difficult challenge. Very few individual’s or professionals out perform their target index. It is vanishingly difficult and that’s why Warren Buffett is a rock star investor. It is a mistake to assume buying Coke Cola and a few other “value” stocks will generate results similar to his.

It is well to remember that a 20 years ago a list of the top reliable, strong dividend paying stocks would have very different names on it. go out 30, 40, 50 years and there is virtually no overlap.

If you are retiring at 40 and live till 80 you best plan to be constantly reevaluating your holdings as the years roll by. Or, let Vanguard do it. Index funds are self-cleansing.
- Dan December 23, 2011, 11:47 am
  
  Mostly agreed collinsnh. One downside to indexes, though- they make tax efficiency through tax loss harvesting somewhat less effective. One can achieve 90% of the benefits of diversification through holding just 50 or so stocks- you don’t need the thousands that are in Vanguard Total Stock Market (Vtsax)
  
  In fact, if you buy the top 30 positions of Vtsax in the same proportions it holds them, and then pick 30 more randomly, you’ll be pretty close to its overall performance- except with the benefit that you can now tax loss harvest and be smart about tax recognition. That is, sell anytime any one stock has a 20% loss or so, and rebuy it 31 days later (at least until you have at least a few years worth of $3k in losses “stocked up” to offset your current ordinary income).
  
  Better yet, keep Vivax (value index) and vhdyx in your tax-deferred accounts, where their high yields don’t hurt you each year, and keep vanguard growth index or ETF (no trading commission!) (yield under 1%!) in your taxable accounts. Together the growth and value indexes essentially equal the total market index, but your smart tax location means you get to F-you money faster.
  
  Even better, once you have over $300k in investments or so, some of your value stocks should be in a few individual “silent dividend” payers (see article and examples I highlighted in previous comments) that behave like high yielding dividend stocks except without the tax bill forced on you each year.
  
  The main point is the tax code forces us to jump through hoops to be smart investors. It is a sad indictment of our system that savings and passive income from investments are taxed at all (most economists agree this is stupid and hurts everyone, rich and poor).
  
  But since they are, we must maximize its features- chief among it the need to defer gains as long as possible, until you’re older and have more need for cash where gains are likely completely tax-free (medical spending over 7.5% AGI is completely deductible!), or you’re eventually financially independent and can look to donating a healthy chunk of your unrealized capital gains to charity (helping the poor tremendously and dodging the tax entirely), or leave a million one two in unrealized gains via your estate to your kids (boom, gains also converted to tax free status, via the tax-basis step up on death).
  
  Mustachianism is about keeping control of your own dolla dolla bills, each one its own little perpetual employee for you, for as long as possible, and not letting the IRS cut off more than you need them to!
  - Dan December 23, 2011, 12:55 pm
    
    Ps collinsnh- in your blog post you say owning a house is not for you. Question- once you’re retired, how can you avoid the awesome feature of owning, namely, that the value of the shelter provided (aka imputed rent) by something you own is totally untaxed? To rent, you have to recognize generally taxable income to pay that rent. Owning means no related income tax at all! A house asset yields more than Vtsax does each year through the free shelter it provides (even after carrying costs like homeowner’s insurance and property taxes), and that imputed rent is tax free! Woohoo!
    - jlcollinsnh December 23, 2011, 2:28 pm
      
      This whole house thing deserves its own post and I have one in the works, along with several others. I’ve been neglecting my blog of late…
      
      …as it happens I am retired and own my home mortgage free. I am also in the process of trying to unload it on the next sucker, er I mean investor, who wants to own part of the American dream.
      
      The only reason to own a home is if you want and are willing to pay for the lifestyle one provides. I bought mine for the environment and schools I wanted in raising my daughter.
      
      owning it has taken up huge amounts of my “generally taxable income” (great phrase BTW) over the years: RE taxes, never ending repairs and maintenance, interest when I had the mortgage and opportunity cost to the extent I paid it off.
      
      Comparing renting to owning is a fairly simple effort if you keep detailed records. just add up all one the above and set it against the rent of where you’d like to live. most times the renting advantage is stunning although in some areas of the country the price of homes has fallen so far it may swing the other way.
      
      and I will say that if someone really wants to own a home and is prepared for all the headaches and expenses that entails, now is probably as good a time as any. certainly better than most of the last few decades.
      
      but renting will always give you more freedom, more flexibility, less risk and more cash in your stash at the end of the day.
      - Dan December 23, 2011, 2:52 pm
        
        Certainly, renting absolutely beats owning, in many high cost areas of the nation. I currently rent in San Jose, CA.
        
        However (and my analysis is primarily for retired people who can make their taxable income whatever they need it to me, not employed people with a fixed income they have to pay taxes on each year no matter what) – if you buy the right kind of house (small, newer, in good shape), you should be able to minimize your property taxes and maintenance / upkeep costs. I’d say for most of the country, for financially independent individuals with say a net worth of $700k or more, it’d be pretty crazy not to move to a relatively cheap area of the country (see MMM’s blog post on that) and buy an approx $100k to $200k house.
        
        I’m totally with you that owning comes with more stress than renting. But when you’re retired, you can save some pretty decent tax money by owning where you live, as that just saved you maybe $10k to $20k a year in taxable income (even after accounting for property taxes and maintenance costs). And of course the house (like REITs) are a great tax-shielded inflation hedge (both due to the tax dodge on the inputed rent value, as well as the implicit “inflation tax” dodge that the $500k/couple in real estate gains provides), one we all definitely need, since we all need a place to live. Rent skyrockets during inflation, skyrocketing your own taxable income / drawdown needs off your portfolio (leading to less tax efficiency).
  - jlcollinsnh December 23, 2011, 2:11 pm
    
    Hi Dan…
    
    I agree with your analysis. My only comment would be that your approach requires far more effort than mine and far more opportunity to mess up along the way. For those who enjoy the process, by all means enjoy. I did for many years.
    
    Now however,as I said, simple is beautiful….
    …at least for me.
    - Dan December 23, 2011, 2:57 pm
      
      Agreed, maximizing one’s tax efficiency takes some work. It should only be attempted after one has maxed out all previous steps of smart investing: maximum savings, minimum investment costs, primarily indexing vs active management, etc.
      
      No disrespect intended (enjoying catching up on your blog), but you seem to be more of the “lazy couch potato” investment portfolio guy (a concept first popularized by Scott Burns and others 20+ years ago; see assetbuilder.com etc), which works for majority of the populace. But this is the MMM blog, and as we know, Mustachianism is about getting off the couch and taking our money and brain muscles to the next level :)
      - jlcollinsnh December 23, 2011, 4:51 pm
        
        Ha! guilty as charged!
        
        Likely because I spent decades “off the couch” and exploring the
        active management side. thru painful and long experience, mine and others, what I learned is with very rare exception, less is more.
        
        Pierre-Louis Maupertuis, in 1744, coined the Principle of Least Action which basically notes that nature likes to do the least possible work. This principle still underpins mathematical physics today.
        
        If it’s good enough for nature, it works for me.
        
        BTW, where are you located? It would be fun to have a coffee with you. I’m in NH.
      - Dan December 23, 2011, 7:44 pm
        
        You’ve achieved financial independence, unlike most readers of this blog, so you can afford to spend more money than required (by not cranking your tax efficiency to the max level). So the pithy nature quote doesn’t work here :)
        
        I’m in California during my wealth accumulation phase, so no coffee anytime soon. Maybe I’ll make it to NH in a decade or two- we’ll see if the Free State Project is far enough along by then :)
      - jlcollinsnh December 23, 2011, 9:17 pm
        
        You are right, I’ve been at FI since 1989. would have gotten there even sooner if I had accepted the Principle of Least Action (read Index funds) before wasting time trying to actively manage my funds.
        
        I like the index approach because it is simple and easy, but I love it because it is more powerful than the alternatives. if I believed even for a moment there was a more effective way I’d be happy to put in the time and effort. Indeed I did for many years. unfortunately.
        
        perhaps you are/will be one of the very few who does outperform the indexes over time. but the odds are stacked against you. Here’s why:
        http://jlcollinsnh.wordpress.com/2011/06/02/why-i-can’t-pick-winning-stocks-and-you-can’t-either/
        
        interesting Baldwin article. thanks. get yourself to NH and I’ll spend some of my dividends and buy the coffee. :)
        
        something more to think about:
        
        for those who embrace the idea of saving 50% of their income and investing for FI, you will very likely succeed far beyond the dollar amount you may have in mind. that wealth, along with the fact that today’s historically low tax rates are not likely to last in the face of our exploding deficits you may well find yourself in a far higher tax
        bracket than planned.
      - Dan December 23, 2011, 10:27 pm
        
        Right. Higher taxes in the future means it is more important than ever to max out your tax efficiency. Future tax increases will probably come from consumption taxes too (a VAT or national sales tax seems inevitable to me, and indeed, a more desirable tax structure), but that is a whole other post- and one Mustachians are well-equipped to combat (through our frugality, and through the never ending stream of used goods via Craigslist that will probably always avoid sales taxes, as it is a gray or black market already for tax purposes for most).
        
        I’m by no means advocating active stock picking. I think indexing should be the core, if not the entire, focus of a total portfolio. What I am saying is that you can essentially match the indexes (especially once you already have $300k or so in indexes already, by matching the proportions of their top 20 or so stocks) while still getting access to great tax saving strategies. Use the tax efficiency to goose your returns, as every penny matters- whils still essentially matching the diversification (if not the ease) of indexing.
        
        I reiterate- I’m not trying to pick outperforming stocks, as I agree with you that this is folly. I am going to use tax loss harvesting and selective gains deferral however to make my FIRE date get here as quickly as possible, and to protect my wealth for as long as possible. With any luck, I’ll be left with hundreds of thousands of deferred unrecognized gains towards the end of my life that I’ll give to charity or leave to heirs, totally tax-free.
        
        This giant finger to the IRS (a lifetime of smart tax efficiency, decades of jumping through all of Congress’ inane convoluted hoops)–knowing I can give generously to others–will be one of the biggest comforts to me as I take my last few breaths! that, and presumably the morphine, if cancer is what gets me :)
        
        Join me, Mustachians :)
      - jlcollinsnh December 24, 2011, 7:26 am
        
        thanks for the clarification, Dan….
        
        ….you and I are much on the same page:
        
        avoid debt
        save 50% of income (the more you save the faster your stash grows and the less you learn you need to live on)
        invest for the long term
        have some asset allocation
        pay attention to where you hold those assets re: taxes
        
        wealth can’t help but follow.
        
        great point on the VAT, BTW. I agree that it is coming and that it is a more desirable tax structure if it replaced the income tax. however, that won’t happen and that’s not why it will become law:
        
        it will be an additional tax added on to the income tax
        it will be the way the gov’t gets their hands on our Roth IRA money protected from the income tax: by taxing it when you spend it.
        
        MMM December 24, 2011, 6:03 pm
        
        Yeah, yeah.. minutiae of dividend and tax planning. But if any other readers have taken the time to click on J.L. Collins’ name, they surely have a much bigger question – what is happening with Uranium C? You got back from the proof-finding trip in August, and the future of Humankind’s understanding of the universe’s most advanced alien race hangs in the balance, yet you just got lazy and decided not to update us!?!? :-)
        (http://uraniumc.wordpress.com/)
      - chrisr December 24, 2011, 11:21 am
        
        Hey dan. I’m very interested in what you’re saying about maximizing gains while minimizing taxes. i’m 23 and am barely beginning my early retirement journey. I’m wondering if you have any book suggestions that point in the direction you’re talking about. I read the articles you pointed to but I enjoy reading more in depth research that books give.
      - Dan December 24, 2011, 12:27 pm
        
        Yeah, mostly agree.
        
        The new national sales tax / VAT won’t replace existing income taxes, but it might take the place of some future income tax increases. So in some sense, it *does* replace an income tax, which is good tax policy. And I don’t think it really hurts Roth holders that much. Anyone who thinks a Roth shields them from ALL future taxes of any kind is pretty naive; we know a future VAT is likely so it’s not like the govt pulled a fast one on us.
        
        The future VAT will hurt a lot more people than just Roth holders, that’s for sure :) It will at least have the positive side effect of at marginally moving our economy away from its huge reliance on consumer spending for GDP growth (as this current 70%+ reliance leads to more than desirable economic volatility). And from a morality perspective, we probably should be buying less stuff anyways(and we will, if taxed more on our spending)!
      - jlcollinsnh December 26, 2011, 7:18 am
        
        Hi Mr. MM….
        
        1st, thanks for a very interesting site. Nicely done and an important topic. Just listening to NPR on the way back from the airport and yet another segment on people pushed to the financial edge by the recent economy.
        
        how people can go thru life without putting aside a cushion for the hard times, which always come, leaves me stunned.
        
        Regarding UraniumC, I knew I should have take that down. :)
        Truth is, being lazy is the least of it. This subject is so beyond my comfort zone, so outside my worldview, as to have left me a bit dazed. My notes from the trip sit on the shelf mocking me.
        
        These last few months have been spent trying to digest it all, and wondering what to do with it. If anything. Candidly it is so “out there” (pun at least a bit intended) it is hard for me to accept, let alone begin to offer to others. If I’m honest I’m not sure I want my name associated with something so unbelievable, facts be damned.
        
        Since your comment on it, I have noticed a spike in traffic there from Mustachians and those who subscribed last spring occasionally ping me asking what’s happening.
        
        One thing I know: Humankind is hardly waiting for this and we really aren’t meant to know. No matter what I write, it will be rejected out of hand. That would likely be for the best anyway…
BDub December 23, 2011, 12:23 pm

I think Dan should write a guest post on tax-efficient wealth accumulation. Most people know about 401Ks and Roth IRAs but we need more complex strategies to become truly mustachian.
Pachipres December 23, 2011, 12:26 pm

Need some advice from all you savy investors. My dh and I are in total disagreement here in Canada. I would like to take money from our low 4% credit line to buy more stock with dividends as the market is in the toilet right now but he doesn’t like to carry any debt whatsover. I would like to see what you mustachians say about this?
Thanks to MMM and all of you who post for such great comments!
- Dan December 23, 2011, 12:31 pm
  
  Terrible idea, pachipres. You’re talking about market timing, aka gambling, that is made even worse by you levering up / using margin (ie using a line of credit). Definitely not Mustachian.
  
  Debt should generally be avoided. And what if you’re wrong on market levels? Save up with real money, not borrowed money.
  - Pachipres December 23, 2011, 1:11 pm
    
    Hi Dan,
    Thanks for your input. You’re the Canadian right? I tell you, I feel so lost when it comes to investing. Right now we have our whole portfolio 920k with Dundee Securities with a financial advisor/investor. I wouldn’t have a clue on how to invest or buy dividends on my own or even if this is a good idea. If there is any ideas out there I would be happy to receive them. Our financial advisor is buying dividends as he too feels this is the way to go but after reading some of these comments, I get the impression some of you are doing your own investing of dividends. Any thoughts?
    - Dan December 23, 2011, 1:19 pm
      
      Nope, not a Canadian- but investment fundamentals hold true across borders.
      
      If you’re currently not hands-on enough with your money to realize that paying someone else to manage your cash isn’t cost-efficient, then I wouldn’t worry yourself too much with how to pick specific investment strategies (that is what you’re paying someone else to do).
      
      Generally, I’d recommend you save the 1% a year (almost CAD 10k!) that your advisor is probably charging you (directly, through his fee, and indirectly, through his likely high trading costs, tax inefficiency, and attempt to actively manage), and instead just put your cash in widely diversified index funds with some minor annual rebalancing.
      
      If that sounds too intimidating, then don’t even bother going further with my ideas in posts above. Smart tax location and use of silent dividend paying individual stocks are much further down the investing priority list than the decision to reduce investment carrying costs by managing your money yourself.
- jlcollinsnh December 23, 2011, 2:55 pm
  
  Hi Pachipres…..
  
  let me just second Dan’s comments here. solid advice, especially on the Index funds.
  
  Not only are they a perfect choice for you but, over time, will very likely out perform anything a professional money manager would have to offer.
  
  investing is only made to sound complicated because lots of people make lots of money selling complicated products and advice. but complicated is not only unnecessary, it generates poorer results.
  - Pachipres December 23, 2011, 3:44 pm
    
    Hi jlcollinsnh
    
    Thanks for responding to my post.
    
    Where would I begin then in pulling $920,000 Canadian dollars out of this Dundee Securites with this investor and then doing what, where to go with this index fund thing you are talking about? Like I said, I am totally green but learning much just reading everyone’s comments.
    - jlcollinsnh December 23, 2011, 4:30 pm
      
      my pleasure, Pachipres…
      
      …lots of fund companies offer index funds, but Vanguard is far and away the lowest cost and best.
      
      Here’s what we own and why:
      
      http://jlcollinsnh.wordpress.com/2011/06/14/what-we-own-and-why-we-own-it/
      
      As Dan mentioned it is worth thinking about which to own where. We own VGSLX and VBTSX in our IRA accounts because they throw off dividends and the IRA protects these from taxes. VTSAX we own outside the IRA.
      
      In my post I describe these three funds in more detail.
      
      Just remember, while investing can be as complicated as you can make it, it can also be as simple as you choose. Index funds make it as simple as possible and offer, with rare exeption, the best results over time.
      
      good luck!
Six Figure Investor December 23, 2011, 2:56 pm

I followed mantra over here from his site. MMM is quite the site, I say this with affection. The crowd here is different than the typical investor/blog crowd that I read every day.

I want to add one additional thought on this topic, which so far hasn’t been discussed. You could in fact find ‘pure growth’ companies that perform better or similar than dividend companies, giving you an instant advantage because it is more efficient for the company to reinvest that you doing the same with the distributed profits.

Warren Buffet is trustworthy, he is proven. But what about other companies?

But from a practical point of view it’s harder to find those companies. The fact that a company distributed profits says a lot about how they run their business and how they view their shareholders. It’s not a guarantee of anything, but a dividend paying company will be more likely to respect the shareholder and manage their balance sheet more efficiently.

If you are an individual investor looking to buy select stocks, the dividend payers give you a big head start to find great companies to invest in.
- Dan December 23, 2011, 7:48 pm
  
  Wrong, six figure. Dividend paying stocks’ total return are about the same as any other kind of stock over the long run. They might have a tiny lead, so over allocate to them if you like, but don’t go whole-hog and focus too much on them. Gotta keep diversified! Especially (if you believe in going against the herd) since value and dividend stocks have been on such a tear lately. If you’re going to depart from wide diversificstion, at least favor what is out of favor :)
  - Six figure investor December 24, 2011, 10:47 am
    
    Where did i say anything about returns?
    - Dan December 24, 2011, 12:31 pm
      
      You did. You said “perform better” , “head start in finding great companies”, “manage their balance sheet better” – only reason you’d use those descriptors is if you thought those attributes lead to better returns. If those attributes don’t lead to outperformance then why bring them up? Maybe I’m confused.
trubulator December 23, 2011, 8:30 pm

I find the emphasis on individual equities to be perplexing. If you like the dividend growth strategy, that is fine and well. But to be brutally honest, most retail investors don’t have any business investing in individual equities uness they are willing to buy a very broadly diversified basket of issues since most retail investors are not sophisticated enough to tell good equity investments from bad ones. Why wouldn’t you simply avoid the individual company risk by investing in a dividend-oriented ETF or mutual fund?
- Dan December 24, 2011, 12:37 pm
  
  Generally agreed, tribulator. However with ETFs / mutual funds, you lose some of the edge of tax loss harvesting and smart tax planning. Once you have a good start on index holding, then start buying individual stocks, in the same proportion as the indexes (at the top with a random smattering below the very top), and you kept 90% of the benefit of diversification, with no “stock picking” (since you’re mostly mimicking the indexes’ holdings)- while simultaneously making it easier for you to at least recognize $3k in losses each year, and in futur years, to be smart about deferring gains for as long as possible (by selling highest basis stocks first in your drawdown phase).
  - trubulator December 24, 2011, 1:07 pm
    
    Sounds pretty inefficient and highly prone to human error (aka fear and greed). Most retail investors are not steely eyed automatons able to invest without letting emotion and the usual behavioral finance traps get in the way. They are human beings and relatively unsophisticated ones at that. The potential for especially beginner (less than 10 years of experience investing) to blow themselves up via bad decisions is high. Advising newbie investors to buy individual stocks is poor gudance, IMO. Scraping together capital to invest takes hard work and time; best to be careful with it.
    
    It is relatively easy to harvest tax losses even with a signle ETF. Presumably one will be buying several lots each year as you feed investable cash into your chosen vehicle. Barring a sustained bull market, at least some of these lots are likely to be underwater at any given time. These are your sales candidates via specific lot identification for tax purposes. If you run into a big, ugly bear, it is possible to very easily harvest tax losses sufficient to cover numerous years. You simply sell all your losing lots of the ETF and use the money to buy a different ETF with a similar but slightly different investment strategy (swap dividend growth for global dividend or straight index). Wait 31 days and you can switch back to your original ETF but in the meantime you are not out of the market so you don’t run the risk of missing a big rebound.
MrGreenshanks December 24, 2011, 5:58 am

Mantra, great article. I read your blog and read your journal at ERE. I believe in dividend investing also, but I go about it a little differently than you. The basic tenets are the same though. You are not only building up a portfolio of good companies, you are building up an income stream. Even if the overall value of the portfolio goes down, the actual income stream still increases, and in some ways, your position improves in the long run when stocks go down, because it is cheaper for your reinvested dividends to purchase more shares of the underlying company. So you win either way, whether the stocks go up or down.
- Dan December 24, 2011, 12:41 pm
  
  Overtime, green shanks, the value of all stocks is related to their income (whether they distribute to you or not). This is not specific to dividend payers, nor is it therefore generally true that even if stock values go down, your income stream increases. Be sure to diversify. Dividend paying stocks aren’t significantly different than other stocks in the long run (except they hurt you every year witha mandatory tax bill).
  - MrGreenshanks December 25, 2011, 5:11 am
    
    Thanks for the advice Dan. I do diversify into different sectors. But if a stock doesnt pay a dividend, I dont even look at it. Im too old 43 to buy assets that dont pay me back. That would be like buying a house and letting a stranger live there rent free. And saying dividends hurt you every year is not much different than saying your paycheck hurts you every year because you must pay taxes. If thats the case, why work overtime? Why celebrate when you get a raise? Or a bonus?
    - Dan December 25, 2011, 1:35 pm
      
      Ps you should only celebrate a raise or a bonus because it will get you to financial independence faster. Other than that, income from a paycheck (or even dividends from a stock) is far less preferrable to capital gains realized from stocks, because they are at higher tax rates and come with no ability to manage the timing of their recognition, and further, come with little opportunity to offset with capital losses and no ability to defer gains.
Dan December 25, 2011, 1:29 pm

Green shanks, you’re confusing dividends for total returns. Just because a stock doesn’t force you you pay taxes each year (ie throug a mandatory dividend) doesn’t mean you cannot get any benefit from that stock. Diversified stocks generally have the same total returns (dividends plus capital appreciation) – regardless whether they dividends or not. If it doesn’t pay out its income in a dividend, the stock price increases by that same amount. So you can recognize income anytime you need (by selling shares with an equivalent value to the income e company generated)- and that is a capital gain which is far preferrable to dividends, from a tx perspective.

Dividends hurt you because you have to pay taxes on them each year. Capital gains are superior because they have lower tax rates, and aren’t forced on you!

My whole history on this MMM post is to dispel the notion that dividend stocks are special and more valuable than their non-dividend brethren. It is a total fallacy to assume dividend payers are better. You’re hurting yourself tremendously if you don’t see the fallacy in your statement that non-dividend paying stocks don’t do anything for you. All else being equal, they’re actually better for you, because of their tax efficiency…
MrGreenshanks December 26, 2011, 5:27 am

Dan, thanks for your response… I must share with you a real life example of how I came to invest the way I do. I was dating a woman a couple of years ago who worked part time. Like me she was separated, but unlike me she had lots of bills. She worked part time. Her husband hadnt abandoned her by any means, he was helping her with the bills, but I could tell just by looking at her house the mortgage wasnt cheap, and she only worked part time. As the relationship grew, we talked about finances, and I asked her how she could afford to keep the house working part time. She revealed to me she received a 1200 dollar dividend check every three months. That helped tremendously. Her father had died years before and left her a substantial amount of shares of a certain utility company paying around 5% yield in dividends. Every quarter, thanks to her father, she received 1200 dollars. Obviously, knowing what we know, she would have been better off reinvesting those dividends over the years, but that was none of my business. If her father had worked for a growth company, and left his daughter a hundred thousand dollars worth of growth stock instead of dividend stock, I imagine this lady could have sold off his shares over the years and still received the neccesary funds to get by, but that wasnt neccesary. She got enough to get by without liquidating a single share of the inheritance her father left her. A few days after she told me this story, I started buying dividend stocks. I havent regretted it yet. This doesnt make dividend stocks ‘better’ than non divvy stocks, but I believe they are better for me. They are certainly more flexible in regards to income orientation. I am sure this lady didnt feel the dividends ‘hurt’ her at tax time, because without them she would have been up the creek. If you want to invest in growth stocks, and choose wisely, you will do well, I have no doubt about that. And if you want to invest in dividend stocks and choose wisely, you will do well also. I feel like I have a better grasp of how to judge a good dividend paying stock than I do a growth stock. There are many reasons for that, but I dont want to hog the comment board here, or steer the conversation away from the true topic, dividend growth investing. That would not be fair to the author.
- Dan December 26, 2011, 1:28 pm
  
  Green shanks, two comments- I’m rally trying to help you here:
  (A) you said she didn’t have to liquidate a single share her father left her. I don’t understand why you think that not liquidating a share is in and of itself a good thing. If you hold 2,000 shares of a $10 stock (so $20k worth) that pays a 5% dividend, then that year get a check for $1,000, and you still keep your $20k worth of stock. If that same exact stock pays no dividend, then you get no check, but your shares are now worth $10.05 each- or a total of $21,000. By choosing the dividend stock, you effectively liquidated five cents from each and every one of your shares- you can’t claim you didn’t give up anything! Said another way, for the non dividend stock, if you need the grand, sell about 99 shares. Then you’re left with about the same cash received ($1k) and the same ending net worth ($20k), except you pay lower taxes with the capital gain! So why are you saying that Selling a share is a bad thing?
  (B) you said you know how topics growth stocks wisely. I question this heavily. You think you are superior to the market, and all it’s participants? You believe you have some natural insight no one else has, and is gives you a leg up on everyone else? As jlcollinsnh and others lave reviewed many many times, iris extremely unlikely that you can really beat the market (using your “wise” selection of certain equities). Study after study shows that indexing consistently and perpetually beats people trying the actively manage and pick “good” stocks. Given this, your stock selections should al dot be selected at random, selected only on criteria used to make sure you are building a well diversified 50+ set of stocks that covers all market caps, styles, and sectors.
  
  To believe that you’ve found some stock-picking magic (fundamental analysis, knowing how to pick a “good stock”, whatever you want to call it) is going to lead you to less money in the long run. So is your blind allegiance to the idea that dividend stocks are somehow special or any different than the cash generating abilities of non-dividend paying stocks (and realize that just because a stock doesn’t pay a dividend doesn’t mean it isn’t s value stock)…
  - Dan December 26, 2011, 1:31 pm
    
    Sorry for the typos, typing on a tablet and still getting used to the keyboard.
  - Dividend Mantra December 26, 2011, 3:45 pm
    
    Dan,
    
    You are giving out information that is misleading at best, and completely incorrect at worst.
    
    To imply that a stock that doesn’t pay a dividend will advance from $10 to $10.05 simply because it didn’t pay a dividend and the dividend-paying stock will stay at $10 because it paid out a dividend is laughable. I am starting to wonder if you understand how the stock market works at all. I don’t understand your logic whatsoever after reading many of your responses. Share prices of stocks are based around market conditions, supply vs. demand, liquidation, quarterly results, employment and housing numbers and so many other things. Dividends are simply just one item in that recipe. As I showed you earlier, I can find many examples of companies that pay out large parts of earnings to shareholders and still vastly outperform stocks that do not pay dividends. You can also find examples on the other side of the table. But your $10 to $10.05 example is completely incorrect, based simply on the fact that the company didn’t pay a dividend.
    
    If a company doesn’t pay a dividend and blows all that excess capital on horrible acquisitions, untimely factory builds or wasteful R&D then the shareholders are vastly better off with receiving dividends, and the share price erosion will quickly prove that fact as shareholders move on to better investments.
    
    Let’s see. Netflix doesn’t pay a dividend. Not long ago it was a darling for many growth investors out there. It’s down almost 60% YTD. That’s a mind numbing amount of money to lose. See, I just found a growth stock that has probably vastly underperformed almost every dividend growth stock out there. Does that prove that dividend growth investing is better? No. It simply shows you that an investor must do due diligence and research with every single investment, whether they pay a dividend or not.
    
    It should be said that dividends paid to shareholders simply give shareholders the choice of whether to reinvest those earnings back into the company that paid them (which would be tax disadvantaged) or reinvest them into other investments, or use them to pay bills. Selling shares of growth stocks to pay bills still triggers taxes, and you also coninuously lose the pool of shares which you are drawing from to pay your bills.
    
    I want all readers to understand that there are many investment strategies out there, and none are inherently better than others. It’s all in what strategies you follow, what objectives you have and what method you use to carry out those objectives. Investing in dividend growth stocks or stocks that do not pay dividends could be equally disastrous if you’re not paying the correct price or if you’re investing in companies that do not produce quality products or have economic moats.
    
    I can show you so many examples of dividend paying stocks that continue to pay out earnings in the form of dividends AND retain earnings to grow the business and share price that I could spend hours doing so.
    
    There are only so many things a company can do with earnings,. They can pay out dividends, they can re-invest in operations or they can pay down debt (generally). To say that a company will automtically outperform or underperform another company based on what they do with some of their earnings (dividends vs. reinvestment) is completely irrational.
    
    I understand that you are trying to convey a point that dividend growth stocks are not the only way to invest, and you are completely correct. Dividend stocks will not always outperform a stock that doesn’t pay a dividend on a total return basis…and the opposite can be said as well. It all depends on the companies you’re speaking of, the products they sell, the valuation at which you purchased your shares, management, market conditions, and so many other things my fingers would get sore typing them up.
    
    Again, I don’t mean to sound rude. But, if you’re trying to educate people (which it sounds like you are), use facts and correct information. A stock going from $10 to $10.05 simply because it didn’t pay a dividend is completely and totally FALSE. Daily gyrations of the market should show you that.
    
    It comes down less to dividends and more to how the company is run from an overall perspective. Dividends just allow a shareholder to reap in some of the earnings without liquidiating shares to do so. Saying a share price is going to automatically advance because it didn’t pay a dividend is not true at all. If so, Netflix would not be down almosdt 60% for the year.
    
    I hope this clears things up for some people. I’m simply here to educate folks and let them make decisions. But, I do use correct information.
    
    I also want people to know that I’m not trying to talk anyone into dividend growth investing. Less demand on shares for Pepsi, Procter & Gamble, Philip Morris and the rest keeps my shares cheap, so I can buy more for less money! Haha. I mean that with tounge-in-cheek.
    
    Best wishes to all!
    - Dan December 26, 2011, 4:27 pm
      
      Mantra- any dollar that isn’t distributed boosts the stock price relative to an identical stock that does distribute that dollar. So to say that you’re reducing your principal pool when you sell shares is misunderstanding that very concept. Selling shares or keeping dividends without reinvesting- they’re both have the identical same effect on your investments. one isn’t anymore a reduction I your total share value than the other. Characterizing dividend stocks as somehow a better way to preserve your principal or starting net stock worth or however you want to phrase it is totally misleading and wil
      Cause your readers subpar returns.
    - Dan December 26, 2011, 4:34 pm
      
      PS you’re also suggesting that some kind of due diligence and research can reveal factors about a stock’s desirability that no one else already realized and that isn’t already reflected in the stock price. In essence you’re advising your readers to ignore the widely concluded evidence that shows active research and stock picking is folly. Indexing beats active stock picking, period. To advise your readers otherwise is a worse disservice than suggesting that a company that chooses to pay a dividend has some inherent benefit over a company that does not.
      - Dividend Mantra December 26, 2011, 5:50 pm
        
        “Indexing beats active stock picking, period”
        
        Not always true. Again, Dan…you simply keep making wide, sweeping generalizations about the stock market, stocks, investing, taxing, etc etc. These generalizations simply cannot be made because every investor is different, with different income, taxes, objectives so on and so on. You simply are not getting it.
        
        Indexing beats active stock picking, period? Hmm, let me go call Warren Buffet and ask him why he didn’t build his multi-billion fortune simpy indexing?
        
        Dan, you have gone on and on with the negativity regarding dividend paying stocks. Can you PLEASE show some credible evidence showing stocks that do not pay dividends have outperformed dividend-paying stocks as a whole? I’d love to see it.
        
        “A dividend is *identical* to someone holding a non-dividend stock and instead selling a few shares equal to the amount of the dividend.”
        
        This is completely untrue. If company XYZ is priced at $100 a share and pays out $1.00 a share annually and I own 100 shares, I receive $100.00 over the course of a year, even if the share price stays flat. If company XYZZ is priced at $100 a share and pays no dividend, I must sell 1 share annually to get the same dollars in my bank account to pay bills. I now only have 99 shares after 1 year. If the share price stays flat, I now have an investment worth $9,900. With XYZ, I have an investment worth $10,000 and I also paid my bills with the $100. This is just one example, which is completely hypothetical. You can simply play with the numbers to make your case. It’s simply IMPOSSIBLE to make such sweeping generalizations about the market, and collecting a dividends vs. selling shares is two totally different strategies and are NOT the same. Your misunderstanding of finance leaves me questioning as to why you are going out of your way to educate others.
        
        You state “Characterizing dividend stocks as somehow a better way to preserve your principal or starting net stock worth…”
        
        You keep using the word better. Notice I do not. Nowhere in my article, or comments, do I say that dividend growth investing is superior to any other investments. In fact I stated–
        
        “I understand that you are trying to convey a point that dividend growth stocks are not the only way to invest, and you are completely correct. Dividend stocks will not always outperform a stock that doesn’t pay a dividend on a total return basis…and the opposite can be said as well. It all depends on the companies you’re speaking of, the products they sell, the valuation at which you purchased your shares, management, market conditions, and so many other things my fingers would get sore typing them up.”
        
        I also stated–
        
        “I want all readers to understand that there are many investment strategies out there, and none are inherently better than others. It’s all in what strategies you follow, what objectives you have and what method you use to carry out those objectives. Investing in dividend growth stocks or stocks that do not pay dividends could be equally disastrous if you’re not paying the correct price or if you’re investing in companies that do not produce quality products or have economic moats.”
        
        Notice I used the words “none are inherently better than others”.
        
        You are the only one here trying to convince people that certain ways of investing are better than others. My article was a primer on dividend growth investing for people that are interested in such an investment strategy. You keep knocking it down explaining how your way is much better. I have done no such things. HOWEVER, when you use incorrect information to back up your points I am going to call you out on it because it’s misleading. AGAIN, I HAVE NEVER STATED THAT DIVIDEND GROWTH INVESTING is better than any other way of investing, and you just can’t seem to wrap your brain around that. It’s troubling that someone who has such a misunderstanding of an article and follow-up comments is trying to make such sweeping accounts on investing.
        
        Again, let me call Warren Buffett. He made his fortune on stock picking…picking stocks that happen to, for the most part, pay large dividends. I’ll let you know what he says.
        
        Please comment back and tell me how far superior your investment strategy is, and how I keep trying to convince everyone that my way is better (when in fact, I’m not).
        
        I’ll wait.
      - Dan December 26, 2011, 6:59 pm
        
        Had to fire up the laptop to get a better keyboard :)
        
        This the MMM blog. Part of the gist of this blog is that, by being smart, we can achieve financial independence faster than we otherwise might. I’m writing counterpoints to your guest post, and subsequent responses, as I believe that your recommended advice actually detracts from Mustachianism. My efforts here are meant to help the readers, presumably much as you intend to do, so in that sense we are on the same side :) In the spirit of MMM, I believe our exchanges can help the readership.
        
        Your XYZ example ignores the fact that if a company has assets it could distribute, but chooses not to, its share price remains higher (by the amount of those nondistributed assets) than if it in fact had distributed them as dividends. In your example, if the company did not distribute dividends, its share price would not stay flat, i.e. equal to the same share price of an identical company that did distribute dividends.
        
        In other words – whether a company chooses to distribute a dividend or not says nothing at all about the desirability of the company as an investment. And yet, one of the main points of your guest post (and indeed, the very title of your blog) is about how dividend payers, because they pay dividends, are therefore remarkable in some way. You feel, because they pay dividends, they are remarkable enough to (a) apparently focus most of your own investment strategy on it, (b) maintain a blog that highlights this high-dividend strategy, and (c) actually provide material to other blogs, like MMM, presumably because you feel this strategy might be helpful to others. Again, presumably, you wouldn’t focus on dividend stocks so exclusively and with so much time involved if you felt that they weren’t better than a more widely diversified stock portfolio.
        
        I’m trying to show the reader that, while dividend stocks have a place in a nicely diversified stock portfolio, (a) they certainly should not be focused on exclusively, as you are doing; (b) they generally should not be in taxable accounts, also as you are doing; and (c) even if your implicit position holds true that companies with larger relative economic moats, or that skew towards value / away from growth, are more worth your investing dollars than other stocks, you can *still* find those kind of stocks that don’t pay dividends. That is, there are zero dividend paying stocks out there that match most of your very thesis, that you are bypassing merely because they distribute their income to their investors in non-dividend ways.
        
        In sort – whether a stock pays a dividend or not tells us hardly anything useful about the desirability of the stock, so to highlight dividend stocks apart from others is illogical, and certainly not in the spirit of this blog.
        
        I believe my many above posts highlighted these contentions, and I provided examples, articles, and suggestions for readers on how to grow their ‘stache in a more diversified and tax-smart, and therefore ultimately faster and safer, way than you write about.
        
        Even apart form all this, is perhaps the most frustrating component of your guest post and responses – that you’re suggesting to the reader that, through active management, research, and investigation, by somehow finding out the “higher quality” stocks, that they can be rewarded better than if they just indexed (or kept an index approach, i.e. if buying individual stocks, they make sure to have 50+ such stocks, spread widely between value and growth, cap, sector, etc). I strongly believe the research of the last 40 years has shown that any benefit achieved through active stock research and picking is due to sheer luck – not due to any true ability on the part of the stock picker.
        
        That is, for every Warren Buffet (who, indeed, has beaten the diversified market, life to date), there is a legion of people who tried to actively manage, and failed. Just because you can point to a given few examples of someone who has beaten the market doesn’t give us any information on evaluating whether active stock picking beats indexing. Indeed, study after study shows that even if a given stock manager outperforms the market in one year, that does not mean he is any more statistically likely to outpeform the market in the next year. There is no meaningful statistical correlation between an active stock picker’s relative performance (compared to an index) from year to year – which greatly suggests that any outperformance was due to luck.
        
        I believe you are being disingenuous when you wrote in a response above that no investing strategy is inherently better than any other. If you truly felt that way, you really would be an indexer (widely diversified), because you’d have no conviction that your chosen path of focusing on dividend payers had any relative benefit versus any other strategy.
        
        To focus your own money and to publish a blog on the topic suggests you believe there is a benefit there to the reader. Fair enough, and I respect your intentions. However, I strongly content that you’re actually doing a disservice to these readers.
        
        I hope my efforts here have given them ample logic, examples, and linked articles to consider actually deviating from your guest post’s suggestions (whether implicit or explicit)- through broader diversification, less or no active stock selection, and better use of the tax code.
        
        We may just have to agree to disagree on this one :) But hopefully our dialog is helpful to readers, both new and old investors alike.
      - Dan December 26, 2011, 7:25 pm
        
        Once last idea, for the reader’s contemplation: note that you laud Mr. Buffett’s strategy of buying high-dividend value companies, and yet, by your own criteria as highlighted in your post, you’d have to actually exclude BRK.B (the most widely accessible way to invest in his holding company, Berkshire Hathaway) from any possibility of investment consideration, because BRK.B pays no dividend.
        
        Why is this – why is BRK.B never paying anything out? It’s certainly not because it isn’t a value-like holding company, or that Mr. Buffett doesn’t have huge cash flows and income, or that he doesn’t invest in large moats.
        
        I’d argue it’s because Mr. Buffett is tax-smart. He realizes that forced dividend distributions are a poor way to make cash available to investors – that he helps his investors, on net, more by never paying a dividend, and instead leaving it up to them on when to get cash via share sales, at the tax time and situation of their choosing.
        
        We would do well indeed to mimic Buffett’s ample ‘stache in this respect.
    - Dan December 26, 2011, 4:47 pm
      
      PPS- you said it yourself: “To say that a company will automtically outperform or underperform another company based on what they do with some of their earnings (dividends vs. reinvestment) is completely irrational.”
      
      Agreed. It is irrational to suggest that a company’s choice to distribute a dividend or not has any bearing whatsoever on its desirability as a potential investment. As such, why your focus on only stocks that pay dividends? Nothing is automatic of course- but why do you believe dividend layers are superior and thus deserve all your investing attention? Why ignore half or more of the equity market, when they can be just as cash return producing to you over the long run (and with superior tax features to boot)?
Wrecked December 26, 2011, 3:15 pm

Dan, I am a complete newbie when it comes to investing in the stock market. I am trying to understand something here.If I understand correctly, what you are saying is that for a non-dividend paying stock, the share price will automatically go up from year to year. I assume this is a generalization, but does it normally hold true?

You also seem to be implying that the share price of dividend paying stocks will not increase. How true is this?

Have I totally missed what your point?
- Dan December 26, 2011, 4:23 pm
  
  Wrecked, holding all other variables equal, and focusing just on a given company’s choice of whether to pay a dividend or not- if a company has five cents a share to distribute as a dividend, and chooses not to, then how doesn’t its share price be higher by five cents relative to the identical company who did distribute it? I guess it is more accurate to show it this way: if a company voluntarily reduces its assets by distributing five cents a share, how doesn’t the stock fall by five cents right at the moment of dividend distribution?
- Dan December 26, 2011, 5:18 pm
  
  PS, wrecked- again, I was comparing two identical equities, with one choosing to pay a dividend and one not. I am not saying all non dividend payers increase faster than all dividend payers; I AM saying that whether a company pays you a dividend or not doesn’t give you any meaningful information about the desirability of the company (other than, obviously, in your quest for diversification, the higher yielders should go in tax-deferred accounts). Dividend payers have no intrinsic superiority and thus do not deserve exclusive focus in an investment strategy, as Mantra does.
MrGreenshanks December 26, 2011, 3:22 pm

All I said was Im more comfortable personally buying dividend stocks. I never said Im a stock picker with some special insight or abilities. Here is a good article that discusses dividends and their impact on total returns on the markets going back in history. http://brownadvisory.com/tabId/277/itemId/415/strongInvestment-Voicesstrong-Dividend-Stock.aspx
Copy and paste.
- Dan December 26, 2011, 4:17 pm
  
  Sure, the share price fluctuates all the time- but those other fluctuations are identical regardless of whether the stock pays a dividend or not. Holding those items equal, for the purposes of comparison, on the day of the income recognition, any undistributed dividend merely increases the share price by the amount of that undistributed dividend. A dividend is *identical* to someone holding a non-dividend stock and instead selling a few shares equal to the amount of the dividend. I don’t get how you say a dividend is superior, when a dividend-paying stock robs you of the choice on when to recognize the tsxable transaction!
- Dan December 26, 2011, 5:01 pm
  
  Greenshanks, your linked paper essentially ignores the fact that, anytime you like, you have the choice to sell shares from a company that has income (or assets) but didn’t distribute it as a dividend. Anytime a company takes a choice away from you (by telling you when you get a dividend), it is a bad thing. Anytime you don’t sell shares (of a non-dividend payer), or anytime you use dividend payouts to buy more shares (of a dividend payer), you’re making the same choice: that you want to invest at the current market prices. That is always a choice. But when a company forces a dividend on you, you had no choice to keep that money in the market in a tax- and hassle-free way. Hence my entire history on this post. Dividends aren’t worth a mantra; they actually are, on net, bad compared to companies that have identical characteristics but that choose not to distribute!
Dan December 26, 2011, 4:12 pm

Dude. Mantra, et al- if a stock earns $.05 a share in a given year, but doesn’t pay that five cents out as a dividend, how can you say that the share price does anything but increase five cents?
- Dan December 26, 2011, 4:39 pm
  
  Key being “all other items held equal”- since all we’re focusing here is on the relative benefit of a given company choosing to distribute a dividend share or not. If instead you’re trying to look for growth versus value stocks, then you still have to ignore dividend yields, because some non dividend paying stocks are more like value stocks (DirecTV, AutoZone, etc) than growth stocks! All that a dividend tells you is that the company isn’t being smart about how it makes its income available to its investors.
- Dividend Mantra December 26, 2011, 7:47 pm
  
  Dan–
  
  “Dude. Mantra, et al- if a stock earns $.05 a share in a given year, but doesn’t pay that five cents out as a dividend, how can you say that the share price does anything but increase five cents?”
  
  Just because earnings go up $0.05, DOES NOT MEAN the stock price goes up 5 cents. That is only true in an absolute vaccuum, a “perfect world”…a world in which the stock market does not exist. There are many factors at play regarding a stock’s price on the market. I’m shocked that you do not realize this.
  
  There are many, many, many stocks that have traded sideways, or have actually declined in value over the last 10 years, even though earnings may have doubled, tripled, or quadrupled. Even some of my stocks, like PG, are examples of this. Just because a company earns an extra $0.05 does not mean the stock prices goes up by such. If a company is overvalued, it takes a long time for the earnings to catch up to the price, and that’s why I talked about valuation in my article.
  
  Your statement is 100% incorrect.
Henry December 26, 2011, 6:19 pm

Dan, what’s wrong with paying taxes? If you think about, we should be fortunate to have the luxury to pay taxes. Democratic societies like United States make it possible for individuals like ourselves to pursue our dreams and obtain our desire wealth. Where I came from, an oppressive communist regime simply takes everything you earn and redistribute it among themselves. I own several dividend paying stocks in a taxable account and I have no problem with paying my fair share each year.
- Dan December 26, 2011, 8:56 pm
  
  Henry, if you believe that the best use of your money is to give it to the US govt, versus all the other choices you have (say, to give to the poorest of the poor via CARE etc), then sure, my tax-smart suggestions are moot. And of course, you can pay more to govt anytime you like- the Treasury accepts contributions. Seriously.
Dividend Mantra December 26, 2011, 7:28 pm

Dan–

“Your XYZ example ignores the fact that if a company has assets it could distribute, but chooses not to, its share price remains higher (by the amount of those nondistributed assets) than if it in fact had distributed them as dividends. In your example, if the company did not distribute dividends, its share price would not stay flat, i.e. equal to the same share price of an identical company that did distribute dividends.”

If this is ture, as you state it is…can you please tell me why NFLX is down almost 60% on the year? It has not distributed assets in the form of dividends and yet the share price is not supported.

Please explain.
- Dan December 26, 2011, 7:39 pm
  
  Mantra, I’m not saying a company that doesn’t pay dividends always go up. I’m saying that when a company chooses to pay out a dividend, it erodes its share price by an equivalent amount. Choosing to pay a dividend doesn’t make a company more valuable to the investor, so your focus on them is irrational.
  
  In effect, a dividend payment just forces you to recognize, as ordinary income, an amount of money that you could instead have electively realized as a capital gain- which is superior for tax purposes. As such, a company making the choice to pay a dividend actually hurts the investor, so arguably the investor, when looking for value, wide moat, high income companies for investing in a non-tax-preferred account, should actually find those very kind of companies that actually pay little if any dividend st all (AutoZone and DirecTV being perhaps the pre-eminent examples).
  - Dan December 26, 2011, 7:42 pm
    
    Berkshire Hathaway is also a great example :) No dividend. Smart.
    - Dan December 26, 2011, 8:15 pm
      
      Mantra- how can you say that a company that hands out an asset doesn’t have it’s stock price reflect the loss of that asset? If that was true, then you’ve just created value from thin air!
      
      Consider mutual funds tracking an index- say, the S&P. If it is trading at a $100 a share, and the index is dead flat for the day, if the fund pays a $1 dividend it’s share price will now be $99. It lost a buck, because it paid out a buck!
MrGreenshanks December 26, 2011, 7:56 pm

The dividend versus growth decision can be viewed as “a bird in the hand is worth two in the bush.” While dividends are subject to the risk of being cut, in practice this occurs infrequently. Growth expectations, however, fluctuate more frequently and more widely, and growth in capital (from retained earnings) does not necessarily lead to growth in earnings due to competition, mismanagement and macroeconomic risks. Thus, the dividend policy should act as a discipline on corporate capital allocation, forcing a company to pick only the best capital projects, balanced by risk and return, before returning remaining earnings to shareholders.

From the article discussing dividends I linked above. I copy and pasted the most important paragraph that deals with Dan’s points. I cant explain it any better. Id encourage everyone to at least take a look at the article. There are many other third party articles making the same points if anyone cares to google dividends and market historical returns.
- Dan December 26, 2011, 8:18 pm
  
  Shanks, this is why I said previously that the article ignores the fact that investors can already get cah out of their investment whenever they want. Merely by having a dividend policy doesn’t help the investor- in fact it can suggest that management is now trying to run an annuity and no longer take growth risks as they are saddled with a dividend expectation.
Dividend Mantra December 26, 2011, 7:59 pm

“Mantra, I’m not saying a company that doesn’t pay dividends always go up. I’m saying that when a company chooses to pay out a dividend, it erodes its share price by an equivalent amount. Choosing to pay a dividend doesn’t make a company more valuable to the investor, so your focus on them is irrational.”

Also, Dan. For my focus being so “irrational”, I wonder what investors who were “selling shares for income” thought of that Irrationality during the recent crash of 07-08. While share prices were falling off a cliff, and therefore the income of people who follow your recommendations to sell shares for income, most dividend growth investors seen their income stay static or rise.

Take Coca-Cola for example. It fell from over $63 in 2008 to a low of ~$39 in early 2009. Yet, the dividend was raised in both 2008 and 2009. So investors using the dividends to pay income weren’t affected at all. People selling shares for income were vastly affected.
- Dividend Mantra December 26, 2011, 8:25 pm
  
  “Mantra, had Coke not distributed dividends those years, its stock price would have been higher by precisely the amount of the dividends -thus leaving it up to the owner whether to obtain that amount in cash or not. I’m sorry that I can’t make this clear. If a company distributes a nickel a share, right at the moment if that distribution, the company’s share price drops a nickel. Thus a dividend choice is inane because it doesn’t help the investor do anything they couldn’t already do.”
  
  Dan. You are incorrect, yet again. And, yet again I’ll use real-world results to back up my opinions and statements, which you do not.
  
  Coca-Cola paid out a dividend of $0.47 on the morning of December 15, 2011. This is the exact moment that the dividend was distributed to shareholders. On closing bell of December 14, 2011 Coca-Cola closed at $66.26. On December 15, 2011 at the opening bell (the moment that dividend was paid out) Coca-Cola opened at $66.91. That’s OPENING BELL. That price is $0.65 more than it closed at, even after the dividend was paid.
  
  If you were correct, in your theory, KO would have immediately opened $0.47 lower to reflect the dividend paid and then would have gone on to trade at levels based on what the market was willing to pay for KO.
  
  A KO shareholder not only received the dividend in cash, to do with what he/she pleased, but also saw the share price increase very nicely as well.
  
  Again, I am only here to educate people and I use facts and figures to back up my statements. I have asked you multiple times for examples to statements you’ve made and you’ve shown none. If you’re going to educate people, please have a deeper understanding of what the stock market is all about and exactly how it operates.
  - Dan December 26, 2011, 8:32 pm
    
    Mantra, stock prices almost always change overnight. In your example (for simplicity sake assuming the ex-dividend date and dividend payment date are identical), had Coke not paid the $0.47, it’s opening bell price would have been $67.38- an increase of 65 + 47 = 112 cents.
    
    Check out Motley Fool on this topic: “The ex-dividend date is the date on which new purchases of the stock are no longer eligible to receive that particular dividend. The stock then trades “ex-dividend,” that is “without” the dividend. On that day, the exchange reduces the price per share by the amount of the dividend. For most dividends and most stocks, you will hardly notice any price change, just because of the noise of daily trading, but for large dividends (such as the $3 special dividend Microsoft paid a few years ago), it’s much more apparent.”
    http://wiki.fool.com/Dividend
  - Dan December 26, 2011, 8:37 pm
    
    Just because the normal noise of stock price movements obscures the straight-up penny-for-penny negative effect of a dividend payout does not mean it isn’t very real.
    
    There is no free lunch. There is no way a company can get rid of assets (like a dividend payout) and not have its share price reflect the loss of those assets.
  - Dan December 26, 2011, 8:48 pm
    
    More: “And don’t be fooled into thinking that relying on the dividend rather than selling leaves you with the original investment intact. It doesn’t. When stocks pay out their dividends, the share price adjusts downward to compensate for the payout.”
    http://www.marketwatch.com/story/the-pitfalls-of-fixating-on-income-2010-04-24?pagenumber=2
    - Dan December 26, 2011, 10:08 pm
      
      More: “There would be more silent dividend payers if not for the clamor from Wall Street traditionalists who see dividends as a sign of strength. Dividend payers outperform non-payers, it is argued. Well, they do, but there is no cause and effect here. The universe of companies that don’t pay dividends is populated for the most part not by companies like AutoZone but by companies like Groupon—speculative growth companies, that is, that don’t have the cash to pay dividends. Growth tends to be overrated by investors and as a result growth stocks underperform value stocks over long periods. But that does not mean that value stocks with buybacks (like Berkshire) underperform value stocks with conventional dividends (like Verizon).”
      http://www.forbes.com/sites/baldwin/2011/11/03/berkshires-clever-tax-free-dividend/3/
Dividend Mantra December 26, 2011, 8:47 pm

Dan,

You live in a world where the stock market behaves as it should on paper. Where a company apparently earns $0.05 and the stock prices rises by an exact $0.05. This world also shows stock prices reduce by the same exact amount of a dividend payout.

I live in a different world-the real world. Where stock prices move up and down, are at times overvalued and undervalued, sometimes react stronger to dividend payouts and sometimes completely ignore dividend payouts. This is a world where a company can grow earnings by 100% and see the stock price stay flat, where the stock price can go up and down by 10% or more for no apparent reasons. It’s because of these drastic up and down gyrations in my world that I invest in dividend growth stocks. The extreme gyrations do not affect my steadily rising dividend checks. It will, however, affect people who sell shares for income. They’ll have to sell more or less shares to net a desired dollar amount depending on the day, and they are completely subject to the crazy market that operates in my world.

Good luck to you and your investment strategy. I certainly do not think my investment strategy is superior to growth investing, owning rental properties for landlording, bond investing, currency investing or anything else. I do know it works for me and it will lead me to financial independence. I’m proving that every single day on my journey.

I wish you well!
- Dan December 26, 2011, 8:53 pm
  
  Fair enough. If I haven’t convinced you, maybe I’ve convinced some readers: dividend payments do not mean your net worth is any less volatile or that your principal is any more safe. By receiving dividend checks you’re doing the same thing as selling shares insofar as you’re reducing your claim to a company’s assets, so dividends aren’t special- regardless of whether you get the dividends in timesof market turmoil or not.
- Dan December 26, 2011, 9:09 pm
  
  That is, living on say a 2% withdrawal via dividends or via selling shares, you still are in the same risk profile. Even in a year the market is down 75%, if you pull out 2% as a dividend (ie choose not to reinvest those dividends), that is the very same thing as selling 2% of your shares of non-dividend-paying stocks. Receiving as dividends instead of selling shares just forces you to pay higher taxes, especially during your wealth accumulation phase (where you really should defer taxation if you can).
  
  And for gosh sakes readers, please diversify and do not try to think you can pick out the good stocks- dividend or no!

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