PP vs Dividend Growth Investing

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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.
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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.
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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.
"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process." - Alan Greenspan, 1966
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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)
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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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Re: PP vs Dividend Growth Investing

Post by jalanlong » Thu Feb 06, 2020 7:26 pm

mathjak107 wrote:
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
Why would he care about the return of the market price of the stock if the dividend rises? He told me how one of his holdings BP has lost like $20 in market price over the last 10 years but he doesn’t care because he has made more than $20 in dividends. He is the owner of a company paying him rising dividends. The price of what someone on the market will pay for the company is irrelevant to him because he is not selling it.
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Re: PP vs Dividend Growth Investing

Post by dualstow » Thu Feb 06, 2020 8:04 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.
Where Graham says that money in the treasury would still belong to the shareholder, I think, well, yes and no.
The argument is made by some that you can judge the financial health of a company by its dividend. You can’t do that with a company like Twitter, obviously, but if a company has been paying for a long time, you can watch for warnings.

Exxon is being watched pretty closely. They have really sunk in value. If the dividend goes, everyone will bail.

Board members often feel inclined to raise or at least maintain a dividend so they themselves can collect it. Maybe they don’t feel the same way as Graham about the value being given away?

jalanlong, I wonder how many different firms your friend (relative) invests in, when he decides to cut and run, and why.
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Re: PP vs Dividend Growth Investing

Post by jalanlong » Thu Feb 06, 2020 8:26 pm

dualstow wrote:
Thu Feb 06, 2020 8:04 pm
jalanlong, I wonder how many different firms your friend (relative) invests in, when he decides to cut and run, and why.
He is an in-law so we have these discussions at family gatherings. According to him he never, ever sells. He is an owner in 3M, Mcdonalds, JNJ etc. and he will never sell. Of course I never looked at his statements nor did I know him in 2008 to be able to discern if he is telling the truth. I guess we will find out in the next major correction. If he truly only looks at the dividends coming in each month and not the market prices of his companies then maybe psychologically he can make it thru a correction.
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Re: PP vs Dividend Growth Investing

Post by dualstow » Thu Feb 06, 2020 8:50 pm

I mean, sometimes a company just stops paying a dividend. When Chevron stalled on the dividend raise I thought about dumping them, but they have since resumed a regular raise. BAC slashed their dividend big time. Your in-law must be aware of some of these. Maybe you can find out more at the next dinner. O0
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Re: PP vs Dividend Growth Investing

Post by mathjak107 » Fri Feb 07, 2020 3:40 am

jalanlong wrote:
Thu Feb 06, 2020 7:26 pm
mathjak107 wrote:
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
Why would he care about the return of the market price of the stock if the dividend rises? He told me how one of his holdings BP has lost like $20 in market price over the last 10 years but he doesn’t care because he has made more than $20 in dividends. He is the owner of a company paying him rising dividends. The price of what someone on the market will pay for the company is irrelevant to him because he is not selling it.
tell him i will gladly pay him a bit more than the dividend , only i keep the invested money since he does not care what it's value is
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Re: PP vs Dividend Growth Investing

Post by mathjak107 » Fri Feb 07, 2020 3:42 am

jalanlong wrote:
Thu Feb 06, 2020 7:26 pm
mathjak107 wrote:
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
Why would he care about the return of the market price of the stock if the dividend rises? He told me how one of his holdings BP has lost like $20 in market price over the last 10 years but he doesn’t care because he has made more than $20 in dividends. He is the owner of a company paying him rising dividends. The price of what someone on the market will pay for the company is irrelevant to him because he is not selling it.
a stock that keeps paying a dividend with zero appreciation eventually would in theory go to zero ...each payment is automatically subtracted off the stocks value ... without appreciation it would eventually hit zero
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Re: PP vs Dividend Growth Investing

Post by dualstow » Fri Feb 07, 2020 6:51 am

mathjak107 wrote:
Fri Feb 07, 2020 3:40 am
jalanlong wrote:
Thu Feb 06, 2020 7:26 pm
mathjak107 wrote:
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
Why would he care about the return of the market price of the stock if the dividend rises? He told me how one of his holdings BP has lost like $20 in market price over the last 10 years but he doesn’t care because he has made more than $20 in dividends. He is the owner of a company paying him rising dividends. The price of what someone on the market will pay for the company is irrelevant to him because he is not selling it.
tell him i will gladly pay him a bit more than the dividend , only i keep the invested money since he does not care what it's value is
O0 That would be a sweet deal if you were younger. Put it in the contract that your grandkids have to continue the payments, in perpetuity. With a 5% raise every fourth quarter.
a stock that keeps paying a dividend with zero appreciation eventually would in theory go to zero ...each payment is automatically subtracted off the stocks value ... without appreciation it would eventually hit zero
I wonder if that makes a point in support of dividend investing. A company that is able to keep its payments up must have value behind it.
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Re: PP vs Dividend Growth Investing

Post by mathjak107 » Fri Feb 07, 2020 8:16 am

the company must see at least as much as was paid in appreciation or you keep going backwards in dollars

it is no different from drawing 4% from a portfolio of non div payers ... you need to see at least 4% to see a 4% total return ...otherwise each payout has the share price going more and more negative , hypothetically to zero value or perhaps a penny .

if anyone feels they don't care what the share price does i will gladly pay more then that dividend but i keep the invested dollars or i will give you a penny
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Re: PP vs Dividend Growth Investing

Post by dualstow » Fri Feb 07, 2020 8:27 am

mathjak107 wrote:
Fri Feb 07, 2020 8:16 am
the company must see at least as much as was paid in appreciation or you keep going backwards in dollars
I look at it more from the standpoint of my personal cost. I didn’t create all of Chevron with my own money. If I put in $10K, I expect to get it back, plus the rising dividend payments.

Unlike OP’s in-law, I absolutely look at share price, but I don’t expect it to keep up with the total market. Unless they are preternatural stock pickers, dividend investors are limiting their upside compared to just buying an S&P fund. (I’m sure they were happier than S&P investors in 2009, though O0 )

The yield on cost is impressive. I also look at yield on holdings. Sometimes it makes sense to leave one dividend for another. Never for an obscenely high, unsustainable payout ratio, but for a company that continues to give a healthy raise each year.
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Re: PP vs Dividend Growth Investing

Post by mathjak107 » Fri Feb 07, 2020 8:36 am

dualstow wrote:
Fri Feb 07, 2020 8:27 am
mathjak107 wrote:
Fri Feb 07, 2020 8:16 am
the company must see at least as much as was paid in appreciation or you keep going backwards in dollars
I look at it more from the standpoint of my personal cost. I didn’t create all of Chevron with my own money. If I put in $10K, I expect to get it back, plus the rising dividend payments.

Unlike OP’s in-law, I absolutely look at share price, but I don’t expect it to keep up with the total market. Unless they are preternatural stock pickers, dividend investors are limiting their upside compared to just buying an S&P fund. (I’m sure they were happier than S&P investors in 2009, though O0 )

The yield on cost is impressive. I also look at yield on holdings. Sometimes it makes sense to leave one dividend for another. Never for an obscenely high, unsustainable payout ratio, but for a company that continues to give a healthy raise each year.
dividend payers got hammered in 2008 ... even AT&T the stock of widows and orphans was smashed .

the failed blue chip graveyard is full of the bluest of blue chips who were dividend aristocrats who failed to hold up and were buried ....

stocks are stocks and that is important to remember.

the dividend aristocrats are supposedly the cream of the crop .

you keep seeing just invest in this group and call it a day .

however what constitutes this group changes all the time so get ready for lots of selling trying to keep up as they get bumped and replaced AFTER THE FACT THEY DID NOT LIVE UP TO EXPECTATIONS . you could be behind the curve here very easily .

these dividend aristocrats are not somehow immune to all the things that effect company's and stocks . Just like other companies, their outcomes change.

in 2009 there were 52 stocks that met the group’s strict criteria.

As of 2012, there were 51.

But of those 51, 13 were different than the original set. So over the course of just 3 years, there was a 27% change in the group’s composition.

in fact going back to 1989's list :

Of those 26, seven are still on the list today, ten were removed because they either cut or froze their dividend, four were removed for an unknown reason, and the remainder were aquired at some point. So at least ten of the 26 had an outcome that is different from the assumption of dividend growth every year through thick and thin.
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Re: PP vs Dividend Growth Investing

Post by Smith1776 » Fri Feb 07, 2020 2:14 pm

dualstow wrote:
Fri Feb 07, 2020 8:27 am
mathjak107 wrote:
Fri Feb 07, 2020 8:16 am
the company must see at least as much as was paid in appreciation or you keep going backwards in dollars
I look at it more from the standpoint of my personal cost. I didn’t create all of Chevron with my own money. If I put in $10K, I expect to get it back, plus the rising dividend payments.

Unlike OP’s in-law, I absolutely look at share price, but I don’t expect it to keep up with the total market. Unless they are preternatural stock pickers, dividend investors are limiting their upside compared to just buying an S&P fund. (I’m sure they were happier than S&P investors in 2009, though O0 )

The yield on cost is impressive. I also look at yield on holdings. Sometimes it makes sense to leave one dividend for another. Never for an obscenely high, unsustainable payout ratio, but for a company that continues to give a healthy raise each year.
Yup, there it is! The thing about dividends is that they allow the owner to think like a real business owner.

People like to say that dividend stock outperformance is subsumed by value and quality factors. Well, that may be so... but honestly who cares? Just because it's a tax inefficient way to get the tilt? Even that might not be true.

https://papers.ssrn.com/sol3/papers.cfm ... id=3402622
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Re: PP vs Dividend Growth Investing

Post by dualstow » Fri Feb 07, 2020 3:04 pm

I haven't responded to all your posts, Smithers, but just assume I'm giving a thumbs up and a "you say it better than I do" to each one in this thread so far. I mean that sincerely.
mathjak107 wrote:
Fri Feb 07, 2020 8:36 am
dividend payers got hammered in 2008 ... even AT&T the stock of widows and orphans was smashed .
I'm glad you mentioned AT&T, but be careful here. AT&T is a good example of a widow and orphan stock indeed, but this is a pitfall into which most anti-dividend Bogleheads fall into as well. It is only barely/technically a dividend raiser. I should know, I held it for years. It raises the div by a penny a year, no more. I held it because I wanted some telecom in my stable of indy stocks and of course the dividend was large, but by no means did I consider it a dividend raiser.

Note that OP's thread title is PP vs Dividend Growth Investing. Not merely chasing large dividends. Otherwise we'd be talking about REITs.
This also addresses your assertion that it's the same as some other investment that pays 4%. No. I have 30-year treasurys that do that, but they don't give me an annual raise.
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Re: PP vs Dividend Growth Investing

Post by Smith1776 » Fri Feb 07, 2020 3:07 pm

Decades and decades ago when Ben Graham shut down his investment partnership (what today would be called a hedge fund), he simply advised people to "buy AT&T" in place of investing in his fund.

The fact that they're still around and doing as well as they are... one hell of a call on Graham's part.
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