PP vs Dividend Growth Investing

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Xan
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Re: PP vs Dividend Growth Investing

Post by Xan » Fri Feb 14, 2020 8:15 pm

Vinny,

The only reason the buyer of the company was willing to pay really anything at all for it is because he would be able to get his hands on the $30,000. If (by some magic) there were an ironclad rule that the $30,000 could never be paid out to shareholders, then there would be no interest in buying the company.

It's the potential for a dividend that gives value to any company. Without it, the money that it owns is locked up and useless forever.

Will post more about my Berkshire thought experiment later.
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Re: PP vs Dividend Growth Investing

Post by dualstow » Fri Feb 14, 2020 8:45 pm

I don’t disagree with everything mathjak is saying. The comparison to stock splits, I would take issue with.
Theories aside, I like dividends because I want supplemental income right now. Additionally, I don’t want to use bonds for all of that extra income.

Lots of info here - http://pages.stern.nyu.edu/~adamodar/Ne ... idend.html
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Re: PP vs Dividend Growth Investing

Post by Kbg » Sat Feb 15, 2020 1:17 am

Let’s try a different analogy...why and how do people buy and sell homes at a profit or a loss? All homes are cash flow negative every single year without fail. Note I said homes, not commercial property.

A business is no different. There are real assets involved and perception of value. The first is tangible the second intangible but both contribute to price. Dividends most definitely not required.
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Re: PP vs Dividend Growth Investing

Post by mathjak107 » Sat Feb 15, 2020 3:01 am

dividends come from appreciation ... period ...the stock price goes up , they return a piece to you via the company selling off a piece of your share price ...any liquid asset can create it's own dividend by you selling equal dollars . to think otherwise is ridiculous .

my reference to a stock split is because both a dividend and stock split are neutral events as far as your value goes ...

all one has to do is think of a mutual fund ... you go to sleep with 100k invested .. the stock pays a 10% dividend so you wake up with 90k still invested and 10k in pocket ... now only 90k gets compounded on in that investment .

you can spend or reinvest that 10k , if you do reinvest you are right back to 100k being compounded on again .. nothing gained nothing lost ----zero sum event.

you have more shares at a lower share price if you reinvested but the same dollars as you had before it went ex div are compounding by the markets .
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Re: PP vs Dividend Growth Investing

Post by mathjak107 » Sat Feb 15, 2020 3:06 am

Xan wrote:
Fri Feb 14, 2020 8:15 pm
Vinny,

The only reason the buyer of the company was willing to pay really anything at all for it is because he would be able to get his hands on the $30,000. If (by some magic) there were an ironclad rule that the $30,000 could never be paid out to shareholders, then there would be no interest in buying the company.

It's the potential for a dividend that gives value to any company. Without it, the money that it owns is locked up and useless forever.

Will post more about my Berkshire thought experiment later.
stocks are traded and sold daily .... that is how all gains are realized ... whether the company does it by selling a piece of your share price off via a dividend or you want to do it via selling a equal dollar part of your shares is irrelevant ... if i chose to reinvest the dividend in the same company as many do then you still have nothing and are letting the same exact invested dollars ride just as if you did not sell .


more shares at a lower price is a wash as you see in my example above , it is the dollars compounding that matter not number of shares .

1000 shares at 100 dollars a share or 100 shares at 1000 dollars a share compounding 9% is identical . so the fact reinvesting a dividend gets you more shares , it is not number of shares but total dollars invested that markets compound on . no different than a stock split behaves .
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Re: PP vs Dividend Growth Investing

Post by mathjak107 » Sat Feb 15, 2020 5:03 am

what creates all this confusion is the automatic set back that has to happen when a dividend is paid .

the amount of the payout always must be accounted for by subtracting it off the share price reducing it before it can trade again . ..in effect they handed you back your own money you had already had invested .

one dollar paid out has 1 dollar coming off your balance ...you are not a dollar a head at all ... a dividend is wash and you are no better or worse than you were prior to it going ex div if you reinvested otherwise if you dont reinvest ,you simply took a withdrawal and have less dollars compounding .

a 100k invested that goes ex div and pays a 10% dividend has 90k left and 10k in hand . if you reinvest you have a 100k left .

if markets go up 20% from there and you did not reinvest you have 90k left going up 20% or 108k

if markets go up 20% and you reinvest than you have a 100k invested and have 120k .

if the stock did not pay a dividend yet , you would have had the same 100k invested and the same 120k as if you reinvested the div ...

non event ...

you creating a cash flow on your own from a non div payers appreciation is no different then the company creating that dividend from appreciation . both of you are selling something to get that cash flow . it didn't fall from a tree .

FINRA MANUAL :

5330. Adjustment of Orders

(a) A member holding an open order from a customer or another broker-dealer shall, prior to executing or permitting the order to be executed, reduce, increase, or adjust the price and/or number of shares of such order by an amount equal to the dividend, payment, or distribution on the day that the security is quoted ex-dividend, ex-rights, ex-distribution, or ex-interest, except where a cash dividend or distribution is less than one cent ($0.01)
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Re: PP vs Dividend Growth Investing

Post by Xan » Sat Feb 15, 2020 8:06 am

mathjak107 wrote:
Sat Feb 15, 2020 5:03 am
what creates all this confusion is the automatic set back that has to happen when a dividend is paid .
Mathjak, I assure you that is NOT a point of confusion. I have every understanding about how a dividend takes value out of a company. Every time you're tempted to correct me on this point, please don't, because I understand and agree with it. It just isn't the issue we're discussing.
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Re: PP vs Dividend Growth Investing

Post by mathjak107 » Sat Feb 15, 2020 8:40 am

if you understand that is fine ... but then you should understand ANY STOCK with the same total return can create the same cash flow from it's gains .

just like reinvesting your dividends in to the same company if the cash flow is not needed so is not taking any distribution from a non div payer and letting the gains compund until you do want to take some income .

no difference , except the cash flow from the non div payer can be more favorable tax wise. either the company sells off a piece of the share price and gives it to you or you create your own cash flow selling off equivalent dollars . the outcome will be the same so your whole premise about dividends being needed is just a lot of hooey ..... all kinds of assets appreciate and create gains without dividends
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Re: PP vs Dividend Growth Investing

Post by Xan » Sat Feb 15, 2020 8:43 am

mathjak107 wrote:
Sat Feb 15, 2020 8:40 am
if you understand that is fine ... but then you should understand ANY STOCK with the same total return can create the same cash flow from it's gains .

just like reinvesting your dividends in to the same company if the cash flow is not needed so is not taking any distribution from a non div payer and letting the gains compund until you do want to take some income .

no difference , except the cash flow from the non div payer can be more favorable tax wise
I don't have time right now to post my whole reasoning, but I'm not arguing against any of that. All that is true for any given investor. But for a company's investors AS A WHOLE, the only way they come out ahead is via dividends.
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Re: PP vs Dividend Growth Investing

Post by mathjak107 » Sat Feb 15, 2020 8:46 am

Xan wrote:
Sat Feb 15, 2020 8:43 am
mathjak107 wrote:
Sat Feb 15, 2020 8:40 am
if you understand that is fine ... but then you should understand ANY STOCK with the same total return can create the same cash flow from it's gains .

just like reinvesting your dividends in to the same company if the cash flow is not needed so is not taking any distribution from a non div payer and letting the gains compund until you do want to take some income .

no difference , except the cash flow from the non div payer can be more favorable tax wise
I don't have time right now to post my whole reasoning, but I'm not arguing against any of that. All that is true for any given investor. But for a company's investors AS A WHOLE, the only way they come out ahead is via dividends.
let me just say that is nonsense and we can close this argument . that is so wrong in logic i don't even want to discuss it any further ...

78 of the largest companies in america that are in the s&p 500 don't pay dividends , never paid dividends and have no intention of paying dividends ... so much for that logic that they don't make money for investors because they dont pay dividends ... a cash flow can be created off any of those 78 stocks if one wanted just the same as if one did not want to reinvest those dividends in to the same company
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Re: PP vs Dividend Growth Investing

Post by dualstow » Sat Feb 15, 2020 3:00 pm

Xan, I am curious. On page 1 you wrote -
Xan wrote:
Fri Feb 14, 2020 9:03 am
Dividends keep a company's collective mind and priorities on the right thing: making money for stockholders. It's easy for a company that doesn't pay dividends to get wrapped up it itself. Dividends keep a company humble. Dividend companies remember the whole point of being in business: to make money.

My opinion, anyway. My stock allocation is a broad market index that includes many dividend and non-dividend companies, so I'm shielded against being wrong!
Your first paragraph made me think you're more into dividends than I am, and I have a bunch of dividend growing indy stocks in a pre-pp vp.
Your second paragraph, then, made me wonder: if that's how you feel, why are you not invested in dividend stocks?
It is it a matter of not having any variable portfolio?
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Re: PP vs Dividend Growth Investing

Post by Xan » Sat Feb 15, 2020 9:38 pm

I think kbg's analogy to a house is a great idea. Let's look at a single-family house, and say that it has a useful life of 50 years. (The IRS says 27.5 but let's say 50.) And we'll leave any land out of it and just look at the house.

Built 1950 - original owner (A) paid $50,000.
1960 - A sells to B for $70,000.
1970 - B sells to C for $90,000.
1980 - C sells to D for $65,000. (The house is starting to get old.)
1990 - D sells to E for $25,000.
2000 - E demolishes the no-longer-useful house.

Investor Carrying costs Capital gain "Dividend" Net total gain
A 10 years of house maintenance $20,000 10 years of living $20,000 + 10 years of living - 10 years of house maintenance
B 10 years of house maintenance $20,000 10 years of living $20,000 + 10 years of living - 10 years of house maintenance
C 10 years of house maintenance $-25,000 10 years of living $-25,000 + 10 years of living - 10 years of house maintenance
D 10 years of house maintenance $-40,000 10 years of living $-40,000 + 10 years of living - 10 years of house maintenance
E 10 years of house maintenance $-25,000 10 years of living $-25,000 + 10 years of living - 10 years of house maintenance
Totals 50 years of house maintenance $-50,000 (which was the original construction cost) 50 years of living 50 years of living - 50 years of house maintenance - construction cost


Some investors made money, some lost money. The net capital gain is only the inverse of the construction costs. It's really the bottom-right cell that tells the tale: across all the investors, they are ahead by the dividend minus the carrying costs minus the construction cost. So for all investors as a whole, it's the same as if the original one had kept the asset its entire life: he bought 50 years of living in the house for the cost of construction plus 50 years of maintenance. Makes perfect sense. And it jives with HB's advice to not consider your residence to be part of your portfolio: you're buying a place to live.

So the only positive that all investors as a whole got out of the property was the "dividend".


On to stocks. A hypothetical company's founder (A) spends $50,000 to get off the ground, and in 1950 goes public, issuing 10,000 shares at $10/share. Let's say for the sake of simplicity that he doesn't end up with any of the shares: he put in his $50,000, gets $100,000 from the initial offering, and no longer owns the company. Let's say this is a Berkshire-style company that "never" pays a dividend.

The company nets a profit of $25,000 every year, but it never pays dividends. It puts the money in T-bills or a savings account. (We'll ignore interest.)

Investors B and C each buy 5,000 shares at $10/share for a cost of $50,000 each. In 1960, B wants to "make his own dividend" and sells half his shares to D for $35/share. In 1970, C sells half his to E for $60/share. By 1980, there are serious problems with the company, and it's valued at just the amount of money that it has in the bank. (I know the P/E has been crazy all this time, but let's go with it.) E cashes out (by selling to F; every transaction must have a buyer) for $75/share. In 1990, the company winds up operations. We'll deal with different scenarios as to why and how.

For now, consider how much each investor, as well as the sum total of all investors, are doing as time goes by. Note that the bottom-right corner, indicating the sum of all the gains by all the investors, never changes.

1950. Company valued at $100,000. Company has $0 in retained earnings/savings.
Investor Shares owned Amount spent on stock Amount earned from stock All-time total gain
A 0 $50,000 $100,000 $50,000
B 5,000 $50,000 $0 $-50,000
C 5,000 $50,000 $0 $-50,000
Totals 10,000 $150,000 $100,000 $-50,000


1960. Company valued at $350,000. Company has $250,000 in retained earnings/savings.
Investor Shares owned Amount spent on stock Amount earned from stock All-time total gain
A 0 $50,000 $100,000 $50,000
B 2,500 $50,000 $87,500 $37,500
C 5,000 $50,000 $0 $-50,000
D 2,500 $87,500 $0 $-87,500
Totals 10,000 $237,500 $187,500 $-50,000


1970. Company valued at $600,000. Company has $500,000 in retained earnings/savings.
Investor Shares owned Amount spent on stock Amount earned from stock All-time total gain
A 0 $50,000 $100,000 $50,000
B 2,500 $50,000 $87,500 $37,500
C 2,500 $50,000 $150,000 $100,000
D 2,500 $87,500 $0 $-87,500
E 2,500 $150,000 $0 $-150,000
Totals 10,000 $387,500 $337,500 $-50,000


1980. Company valued at $750,000. Company has $750,000 in retained earnings/savings.
Investor Shares owned Amount spent on stock Amount earned from stock All-time total gain
A 0 $50,000 $100,000 $50,000
B 2,500 $50,000 $87,500 $37,500
C 2,500 $50,000 $150,000 $100,000
D 2,500 $87,500 $0 $-87,500
E 0 $150,000 $187,500 $37,500
F 2,500 $187,500 $0 $-187,500
Totals 10,000 $575,000 $525,000 $-50,000


1990.

Scenario 1: The company craters. It burns through all its cash reserves and goes under. The final numbers are the same as 1980.

Scenario 2: The company has $1,000,000 in the bank. The company smoothly ceases operations and distributes its retained earnings as a dividend. The final numbers are:

Investor Shares owned Amount spent on stock Amount earned from stock sale Dividend All-time total gain
A 0 $50,000 $100,000 0 $50,000
B 2,500 $50,000 $87,500 $250,000 $287,500
C 2,500 $50,000 $150,000 $250,000 $350,000
D 2,500 $87,500 $0 $250,000 $162,500
E 0 $150,000 $187,500 $0 $37,500
F 2,500 $187,500 $0 $250,000 $62,500
Totals 10,000 $575,000 $525,000 $1,000,000 $950,000


Just like the house example, in both the "collapse" and "smoothly cease" scenarios, the net gain for all the investors as a whole is the amount of the dividend minus the initial startup cost. And it was the potential of the dividend that kept up any interest in owning the stock. Ultimately, every company will have a day when it stops operating, and this is the final destiny of all of them. This ability to distribute the company's assets to shareholders is what gives value to any company. If the company were truly forbidden to distribute dividends, then you end up with Scenario 1, except much worse because such a stock would never have had any value.

I think it's clear that without dividends, the various investors are passing the same shares around, with no effect on the total net gain, which remained at the inverse of the startup costs throughout. That is zero sum.




I also did the math on an alternative scenario where the company builds a reserve of $100,000, then pays out its $25,000 every year as a dividend.

The 1950 initial condition is the same.

1960. Company valued at $150,000, $100,000 in the bank. B's shares are worth $15/share.
Investor Shares owned Amount spent on stock Amount earned from stock sale Dividend All-time total gain
A 0 $50,000 $100,000 0 $50,000
B 2,500 $50,000 $37,500 $75,000 $62,500
C 5,000 $50,000 $0 $75,000 $25,000
D 2,500 $37,500 $0 $0 $-37,500
Totals 10,000 $187,500 $137,500 $150,000 $100,000


1970. Company valued at $150,000, $100,000 in the bank. C's shares are worth $15/share.
Investor Shares owned Amount spent on stock Amount earned from stock sale Dividend All-time total gain
A 0 $50,000 $100,000 0 $50,000
B 2,500 $50,000 $37,500 $137,500 $125,000
C 2,500 $50,000 $37,500 $200,000 $187,500
D 2,500 $37,500 $0 $62,500 $25,000
E 2,500 $37,500 $0 $0 $-37,500
Totals 10,000 $225,000 $175,000 $400,000 $350,000


1980. Company valued at the $100,000 it has in the bank. E's shares are worth $10/share.

Investor Shares owned Amount spent on stock Amount earned from stock sale Dividend All-time total gain
A 0 $50,000 $100,000 0 $50,000
B 2,500 $50,000 $37,500 $200,000 $187,500
C 2,500 $50,000 $37,500 $262,500 $250,000
D 2,500 $37,500 $0 $125,000 $87,500
E 0 $37,500 $25,000 $62,500 $50,000
F 2,500 $25,000 $0 $0 $-25,000
Totals 10,000 $250,000 $200,000 $650,000 $600,000


1990.

Scenario 1: The company craters. It burns through all its cash reserves and goes under. The final numbers are the same as 1980.

Scenario 2: The company has $100,000 in the bank. The company smoothly ceases operations and distributes its retained earnings as a dividend, in addition to its normal dividend. The final numbers are:

Investor Shares owned Amount spent on stock Amount earned from stock sale Dividend All-time total gain
A 0 $50,000 $100,000 0 $50,000
B 2,500 $50,000 $37,500 $287,500 $275,000
C 2,500 $50,000 $37,500 $350,000 $337,500
D 2,500 $37,500 $0 $212,500 $175,000
E 0 $37,500 $25,000 $62,500 $50,000
F 2,500 $25,000 $0 $87,500 $62,500
Totals 10,000 $250,000 $200,000 $1,000,000 $950,000



For Scenario 1, the situation is obviously much better for investors with dividends paid out as they're earned. For Scenario 2, the total amount earned by investors is identical to the non-dividend company.
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