Well, if it makes you feel any better, I’m gen X and felt the same way. Was too young and made too little to invest much when the market was ripping throughout the 90’s. Then right when I was sort of established and in prime earning years the 2000 and 2008 crashes. During the long slow way out of the 2008 hole lost my job in a terrible job market and was out of work for 2.5 years right at the age when age discrimination becomes a thing. Went back for MS degree as an old fart and took on student debt. Spent all of our life savings and almost put house on the market (rather than lose it) before I finally found employment.
You just have to roll with things, do the best you can, and hope you ultimately don’t get fucked.
This is definitely true for the portfolios for people in a conventional balanced fund made of of stocks and bonds. At this point, a significant increase in interest rates will drive down the price of both bonds and stocks. This basically breaks the whole concept of a bond/equity balanced portfolio which is supposed to benefit from negative correlations between equity and fixed income.
I would lean more toward broader diversification beyond stock and bond indices. Although fees can become a problem. If you have access to target date funds in a 401k alot of them will already incorporate stuff like commodities and real estate.
I made a post in April 2020 about this when I noticed that the pandemic crash had reversed this negative correlation, specifically in March 2020.
I never got around to digging any deeper to see if there were bond components that were disproportionately contributing to this, but I happened to revisit this last week to see if things had gone back to normal, and they haven’t. I still have no idea if it’s significant (or actionable in any way), but it still seems weird to me.
I’ve been reading up on this approach to investing–concentrating your stock portfolio in dividend aristocrats–well-established companies that have consistently paid an increasing dividend for 10, 20 years or more.
Trying to work out the pros and cons of this approach vs my current approach–plowing everything into a Vanguard Life Strategy fund.
A dividend is you being forced to liquidate a small amount of your equity whether you want to or not.
It’s not the free money event that many dividend enthusiasts seem to think it is. It’s basically neutral but it also has tax implications unless in a retirement account.
I saw this awhile ago on the internet, pretty sure from one of those libertarian financial things which is why I didn’t really get into it, biggest pros are downside risk is lower as most of those companies ain’t gonna go bankrupt if things go to shit and figuring out which ones are definitely still gonna be around say 25 years from now but even they are kinda high p/e wise for the most part and I’m not really a thing on stuff that’s unhealthy when people are slowly starting to figure out maybe we shouldn’t be doing that. of course the main one I thought about was HSY which is up pretty good since I bailed lol me.
Well I think part of the idea is that dividends are reinvested over the years, thereby deferring realized capital gains until the portfolio grows so large by retirement that you can begin to draw an income from the dividends alone sufficient to cover your life expenses.
If a stock pays a 1% quarterly dividend, the stock will just drop 1% on the day it pays out.
You can pay yourself any dividend% you want for any stock. For example, ATT has paid around a 7% div for years and the stock has moved from about 35 to 25 in the last decade. It would have been about 42 if it never paid one. Disney on the other hand doesn’t offer a div. Its at 175 and would about 110 if it paid ATT’s dividends over the years.
Dividends are essentially nothing and at most are just psychologically appealing for a simple liquidation decisions.
Reinvesting dividends is nothing more than selling the percentages of shares on monday and buying the same shares on again on tuesday. It’s nothing.
Or in another way, a poker site offering 25% rakeback while charging 25% more rake at the tables.
You realize that you have to pay tax on bolded, right? Unless you’re in a tax protected account. If there was no dividend, then you don’t have to pay tax until you realize gains, which whenever you like (now, later, even never is possible). That’s what Riverman is getting at.
I assume your Vanguard fund spits out a pretty decent dividend too, so the mechanics should be the same.
Dividends count as taxable income whether they’re reinvested or not. There are some complexities (ordinary vs. qualified dividends with different tax rates) but this is independent of capital gains. Again, not really an issue for retirement accounts.
The problem with dividend enthusiasts is that they tend to focus on the number of shares they have while caring less about the value of those shares.
They love to extol the virtues of “living off the dividends” but there’s nothing particularly beneficial about this approach. It may feel better to see the same number of shares in your account after a distribution, but it ignores the value of the shares. (As @Formula72 says above, the value is always reduced by the dividend)
Similarly, during the accumulation phase whey they’re reinvesting dividends, they love to see the number of shares in their account increasing. But for the same reason, it’s a mirage.
Another risk is the lack of diversification you take on by concentrating on dividend stocks. Plus managing your own portfolio of 30-40 individual dividend stocks is a nightmare especially if you’re accounting for reinvesting.
I went down the path you’re on 10 or 15 years ago. I even read a couple of books and the arguments presented seem compelling. But I eventually decided it was all basically smoke and mirrors.
Thanks for the responses. Don’t worry, haven’t gone down that path, just trying to understand it, and based on the responses here and my own doubts about it, I think I’ll just stick with my current set-and-forget DCA into an index fund approach, as it seems to be working fine so far.
By the way, some people do not actually believe this, they have somehow convinced themselves that dividends are free money. Sometimes they don’t understand how dividends work and are looking at the wrong day and not finding the drop. More often, a typical quarterly dividend is so small relative to the stock price that the drop can get lost in the day-to-day price fluctuations.
The way to win this argument quickly is to find a company that has recently issued a “special dividend” that is large relative to it’s stock price. For example, in early September RMR distributed a $7 dividend, about 15% of it’s value. Gee whiz, the next day the stock opened down $6.61. Pretty much undeniable.
The next phase of the argument usually starts with “Well, sure the price drops temporarily, but it always bounces back quickly since dividend-issuing companies are so strong and well-run and stable!”
This conversation is giving me serious flashbacks to the Dogs of the Dow strategy on the motley fool, and how it took them like 5 years to admit it was nonsense. God I’m old.
Not that I don’t believe it, but the convincing argument should be an explanation of what happens on an ex-dividend date. I actually don’t know, so I’m hoping someone can explain it. Are open orders automatically adjusted? Like if I have a limit order to buy a $100 stock if it reaches $99, and they issue a 1% dividend, does my order still execute at $99? Because if the argument is just that the fundamental value of the company has decreased and the efficient market hypothesis will ensure the price reflects the new value, I’m going to be skeptical.
