PP vs Dividend Growth Investing

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jalanlong
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PP vs Dividend Growth Investing

Post by jalanlong » Thu Feb 06, 2020 12:05 pm

At a family gathering last night I had the opportunity to discuss investing with a man who studies stocks as a hobby. He debated very intensely with me his view of the PP vs what he does which is just cash and safe, conservative dividend stocks. I would be interested in this forums' takes on his arguments. He started investing many years ago after reading the stories of average people like Anne Scheiber, a woman who never made more than $4,000 a year but bought several dividend stocks early in life, never ever sold them and died a multi-millionaire. He sent me this link:

http://www.thecompoundinvestor.com/article-archives/

So I discussed with him the uncertainty of the future, the low volatility of the PP and the all-weather nature of it. His take is that volatility is not relevant to him because once he buys a stock, he is there forever. So he pays no mind to the ups and downs in price, only to the dividend payments he receives which he points out actually went up in 2000 and in 2008 when the market itself went down double digits. He says he is buying himself (and his heirs) a perpetual annuity which will pay out increasing dividends for the remainder of his life and his family's life. A sample of some of his stocks would be things like 3M, JNJ, Union Pacific etc. And even if he did care about the gyrations of the portfolio value, he says that stocks put him so far ahead of the PP so when they do have a -30% bear market he is STILL ahead of where he would have been with the PP.

Of course he admits he is discounting scenarios like complete financial meltdowns which would make his stocks worthless and our gold stores a life preserver. But he says barring that happening, his portfolio is superior to the PP.

He made some great arguments, a lot of which I have forgotten. What are your opinions on his theory? I tried to poke more holes in it but he had answers/statistics for everything!
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Re: PP vs Dividend Growth Investing

Post by Smith1776 » Thu Feb 06, 2020 3:00 pm

jalanlong wrote:
Thu Feb 06, 2020 12:05 pm
At a family gathering last night I had the opportunity to discuss investing with a man who studies stocks as a hobby. He debated very intensely with me his view of the PP vs what he does which is just cash and safe, conservative dividend stocks. I would be interested in this forums' takes on his arguments. He started investing many years ago after reading the stories of average people like Anne Scheiber, a woman who never made more than $4,000 a year but bought several dividend stocks early in life, never ever sold them and died a multi-millionaire. He sent me this link:

http://www.thecompoundinvestor.com/article-archives/

So I discussed with him the uncertainty of the future, the low volatility of the PP and the all-weather nature of it. His take is that volatility is not relevant to him because once he buys a stock, he is there forever. So he pays no mind to the ups and downs in price, only to the dividend payments he receives which he points out actually went up in 2000 and in 2008 when the market itself went down double digits. He says he is buying himself (and his heirs) a perpetual annuity which will pay out increasing dividends for the remainder of his life and his family's life. A sample of some of his stocks would be things like 3M, JNJ, Union Pacific etc. And even if he did care about the gyrations of the portfolio value, he says that stocks put him so far ahead of the PP so when they do have a -30% bear market he is STILL ahead of where he would have been with the PP.

Of course he admits he is discounting scenarios like complete financial meltdowns which would make his stocks worthless and our gold stores a life preserver. But he says barring that happening, his portfolio is superior to the PP.

He made some great arguments, a lot of which I have forgotten. What are your opinions on his theory? I tried to poke more holes in it but he had answers/statistics for everything!
The easiest way of bashing his arguments would have been to simply invoke the Modigliani and Miller dividend irrelevance theorem.

Just remind him that dividends are not income. They're simply a withdrawal where management is just handing over the property you already own.

You can point out that when a dividend is issued, the price of the stock goes down by the amount of the dividend. He basically has an underdiversified 100% stock portfolio with a fair degree of tax inefficiency.
For the money you can't afford to lose, why would you invest it in anything other than the PP? ???
Check out the Goldsmith PP: https://www.gyroscopicinvesting.com/forum/viewtopic.php?f=1&t=9613
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Re: PP vs Dividend Growth Investing

Post by dualstow » Thu Feb 06, 2020 3:08 pm

Well, it's been discussed a thousand times of course, here and elsewhere.
The bogleheads give their reasons why it's inferior to total return strategies.

In the 90s, I read an essay online (no, not a GeoCities site!) that began, "The only way I know of to ensure a large inheritance for your kids is to put a million dollars into dividend stocks."
I didn't have a million dollars to start with, but it was my initial strategy, and I still have some vestiges of it, mentioned here multiple times.
In retrospect, I think I would have been happy if I had stayed all in, in the dividend strategy, but that's because I don't have a sizable non-investment income. ie taxes are not a problem.

Psychologically, the surviving dividend stocks still make me happier, but I don't regret moving on to lazy portfolios and the permanent portfolio. Mainly, moving to index funds (which, funnily enough, is what my dad had all my $ in before I was old enough to take over).

ADDED: if you do go down that road, you had better diversify.
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Re: PP vs Dividend Growth Investing

Post by Smith1776 » Thu Feb 06, 2020 3:20 pm

I was poking around some of Ben Graham's work from the 1930s, namely the first edition of Security Analysis. I found some interesting stuff.

From page 333:
Experience would confirm the established verdict of the stock market that a dollar of earnings is worth more to the stockholder if paid to him in dividends than when carried to surplus.
From page 336
A Paradox. -- While we have concluded that the payment of a liberal portion of the earnings in dividends adds definitely to the attractiveness of a common stock, it must be recognized that this conclusion involves a curious paradox. Value is increased by taking away value. The more the stockholder subtracts in dividends from the capital and surplus fund, the larger value he places upon what is left.
From page 507:
Dividends paid to common stockholders do not in themselves make the stock any safer. The directors are merely turning over to the stockholders part of their own property; if the money were left in the treasury it would still be the stockholder's property.
It appears that Graham, decades before Modigliani and Miller published their work, was well aware of the fact that the value of a stock goes down by the amount of cash that leaves the company. It's clear he realizes that cash is cash.

However, despite this recognition, he still thinks dividends add to the attractiveness of a stock.

Larry Swedroe often remarks that investors should never have a preference for dividends unless you "don't think a dollar is worth a dollar".

Well, as far as Graham was concerned, a dollar is indeed worth more than a dollar when paid as a dividend rather than kept on the balance sheet. Just some interesting historical tidbits.
For the money you can't afford to lose, why would you invest it in anything other than the PP? ???
Check out the Goldsmith PP: https://www.gyroscopicinvesting.com/forum/viewtopic.php?f=1&t=9613
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Re: PP vs Dividend Growth Investing

Post by dualstow » Thu Feb 06, 2020 3:31 pm

Oh, one thing that has changed since I started investing:

B'heads always argue that one should sell shares to "create your own dividend" when you need it.
I've noticed that with the dearth of stock splits, that's getting harder for me to do. A lot of my stocks are upwards of $200 per share. It didn't used to be that way. If I have 50 shares of Lockheed, I'm not selling 1 share here and there. I'll just continue to collect the dividend -- paradox notwithstanding -- and exit 100% when I need to exit.
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Re: PP vs Dividend Growth Investing

Post by Smith1776 » Thu Feb 06, 2020 3:49 pm

dualstow wrote:
Thu Feb 06, 2020 3:31 pm
Oh, one thing that has changed since I started investing:

B'heads always argue that one should sell shares to "create your own dividend" when you need it.
I've noticed that with the dearth of stock splits, that's getting harder for me to do. A lot of my stocks are upwards of $200 per share. It didn't used to be that way. If I have 50 shares of Lockheed, I'm not selling 1 share here and there. I'll just continue to collect the dividend -- paradox notwithstanding -- and exit 100% when I need to exit.
For what it's worth, I am intellectually sympathetic to dividend investing. I think Graham's thinking that I mentioned above still has real validity to it. The behavioural benefits are also perfectly legit.
For the money you can't afford to lose, why would you invest it in anything other than the PP? ???
Check out the Goldsmith PP: https://www.gyroscopicinvesting.com/forum/viewtopic.php?f=1&t=9613
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Re: PP vs Dividend Growth Investing

Post by jalanlong » Thu Feb 06, 2020 4:01 pm

Smith1776 wrote:
Thu Feb 06, 2020 3:49 pm

For what it's worth, I am intellectually sympathetic to dividend investing. I think Graham's thinking that I mentioned above still has real validity to it. The behavioural benefits are also perfectly legit.
That was what my in-law kept trying to impart to me. He claims that he has to do very little work. No worries about rebalancing or asset allocation or selling shares. Each month he buys a small amount of whatever stock, 3M or Johnson and Johnson, and then he is done with those funds forever. Just sits back and collects the dividend checks. I believe he thinks more like the long-term owner of a company as opposed to people who think about stocks as asset classes and how classes move in relation to each other. He doesnt care what the company is selling for next week or next month. As long as the dividend checks keep rolling in he is fine.
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Re: PP vs Dividend Growth Investing

Post by Smith1776 » Thu Feb 06, 2020 4:04 pm

jalanlong wrote:
Thu Feb 06, 2020 4:01 pm
Smith1776 wrote:
Thu Feb 06, 2020 3:49 pm

For what it's worth, I am intellectually sympathetic to dividend investing. I think Graham's thinking that I mentioned above still has real validity to it. The behavioural benefits are also perfectly legit.
That was what my in-law kept trying to impart to me. He claims that he has to do very little work. No worries about rebalancing or asset allocation or selling shares. Each month he buys a small amount of whatever stock, 3M or Johnson and Johnson, and then he is done with those funds forever. Just sits back and collects the dividend checks. I believe he thinks more like the long-term owner of a company as opposed to people who think about stocks as asset classes and how classes move in relation to each other.
Right. It may not technically be as "efficient" as, say, a total market fund or a good factor fund. But there's a lot of worse ways one could spend that money.

I think we should just be happy that our friends and family are investing money rather than squandering it, and leave it at that with them.

Better than dropping it at a roulette table. 8)
For the money you can't afford to lose, why would you invest it in anything other than the PP? ???
Check out the Goldsmith PP: https://www.gyroscopicinvesting.com/forum/viewtopic.php?f=1&t=9613
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Re: PP vs Dividend Growth Investing

Post by Kbg » Thu Feb 06, 2020 4:54 pm

If one has the fortitude to hang through thick and thin it’s a solid plan. Of course that assumes the dreaded SHTF doesn’t happen.

Selling shares vs dividends is really a tax thing...and the BHers are right on this one
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Re: PP vs Dividend Growth Investing

Post by sophie » Thu Feb 06, 2020 6:17 pm

Cash and a diverse collection of blue chip dividend stocks are the traditional way to invest, and it's a perfectly reasonable portfolio. I read somewhere that this is what Ben Bernanke uses, and you gotta think that this guy knows something about how to handle money. Remember when you had stock certificates in a safe deposit box, and to find their value you had to go hunt through a newspaper with pages of teeny tiny print? And you had a big chunk of cash in a passbook savings account at your local bank where you got a toaster or a set of wine glasses? (My mom still has those wine glasses!!)

I still prefer the PP for its safety though. I already know what I'm like during a stock market correction: I'm a mess. More power to this guy if he can keep a cool head through, say, 10 years of flat or negative returns.
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Re: PP vs Dividend Growth Investing

Post by jalanlong » Thu Feb 06, 2020 6:38 pm

sophie wrote:
Thu Feb 06, 2020 6:17 pm
More power to this guy if he can keep a cool head through, say, 10 years of flat or negative returns.
He claims to never look at the daily fluctuations or the market value of his portfolio at all. All he does is look at the dividend income he receives on his monthly statements . He says that year over year that always goes up regardless of what the market did.
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Re: PP vs Dividend Growth Investing

Post by mathjak107 » Thu Feb 06, 2020 7:01 pm

The stock still needs to see appreciation to see a positive return at all ..a 4% dividend needs at least 4% appreciation to see a 4% return.. so a rising dividend in a down market only means the stock needs more appreciation to see that payout amount as a positive return ...that person is financially ignorant
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