Dividend Growth vs Shareholder Yield

[MachineGhost]

Anyone know of any comparisons of the two investment strategies head to head?  I'm a little frustrated that I can't find anything.  These both represent the cream of the crop in terms of elite stock picking skillz (except maybe that of strict value).

[MachineGhost]

I already have the book, but it doesn't do any comparisons.  Anyway, I came up with this.  It's far from perfect, but it's the best I can do right now.  So far, Shareholder Yield is losing, which is pretty pathetic considering none of these dividend funds do the job properly.  I'm skeptical about the buyback bubble, where borrowing debt to repurchase shares at overvalued prices makes any sense.

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[MachineGhost]

How about a legend of what the different colored lines represent?

Read the top of the window.  The Y-axis is showing the cumulative gain in percentage.

EDIT: I updated the chart.  I had a wrong ticker that was short changing the history.

[sophie]

Could someone enlighten me about what these two strategies are exactly?

Dividend Growth = buy e.g. the dividend aristocrats and continually reinvest?
Shareholder yield =

[MachineGhost]

Could someone enlighten me about what these two strategies are exactly?

Dividend Growth = buy e.g. the dividend aristocrats and continually reinvest?
Shareholder yield =

Dividend growth is specifically only buying dividend-paying companies that have an established history of raising their dividend every year by x%.  Take Coke for example.  I believe it has a yield of around 3% at present.  Not exciting and the vast majority of investors chasing yield will ignore it.  But, they have been raising it an average of I believe 9% a year for decades.  The ETF's I've listed are actually relatively new and I may be wrong in that they have overcome the limitations of traditional dividend funds which don't focus on anything but high yield and don't have regular payouts, something that isn't a problem when you're picking dividend growth stocks yourself.  Valuation isn't usually considered an issue with dividend growth investing because you are doing it to generate an income and don't care about capital gains or losses; if not for income then the reinvestment will be averaged out on the bulls and the bears.

Shareholder yield is closer to the holy grail of discounted cash flow analysis of stock valuation in that it accounts for all of the possibilities that a corporation can do with its free cash flow (i.e. cash flow after capital expenditures): buy back debt, buy back stock, pay out a dividend or something else I forget.  So it's essentially a composite dividend yield of those four factors.  A proper accounting would also take into account options issuance which dilutes the stock, but that's typically called net shareholder yield.  I can't remember if SYLD takes options issuance into consideration or not.

We all know -- that in the past -- buying the highest yielding stocks outperforms the market (which could be value investing in disguise given what junk pays high current yields); but buying dividend growers in general outperforms even that.  So I want to know if a better version of dividend yield (i.e. shareholder yield) actually beats dividend growers before I put any money into either.  My gut feel says the growers, but my brain says shareholder yield.

If these new dividend ETF's actually pan out (I've done no research yet), then I think the time is rapidly approaching where there's simply no point in picking individual stocks anymore because Wall Street is monetizing literally every edge as fast as anyone thinks of one.  That is sort of bittersweet, though their track record of not screwing things up isn't stellar.

[Mark Leavy]

The problem with shareholder yield is that it is all funny money.  Numbers from an annual report you may or may not be able to trust.  How can you tell the companies that are reporting honestly versus the companies that are hiding a huge issue?  Total stock market bias overrides a lot of the numbers.

Dividends are more honest.  It's really hard to lie about cash distributions.  You either have the cash to distribute or you don't.

In theory, shareholder yield should be the better metric.  But in real life cash talks, bullshit walks.

[MachineGhost]

In theory, cash flow/free cash flow is the least hardest metric to manipulate on the financial statement since it's before all of the accounting tomfoolery.  The difference between looking at what percentage of the free cash flow is paid out in dividends for growers vs shareholder yield seems subtle.

The problem with paying out dividends is the double taxation.  Dividend-paying companies have been decreasing in quantity over time since stock buybacks became legal in 1982.

But, I definitely like the idea of cash in my cold, dead hands.  Especially since I can determine when to reinvest them (i.e. when the stock is actually undervalued) and not some C-suite goonie looking to pump up his bonus and who cares not a whit about the shareholders.

So if you borrow debt to buy back your equity, it's a wash!!!  It's no different than the stock split or options issuance fad during the dot.com bubble.  Investors will ignore what they want to ignore.

[sophie]

Dividend growth is attractive to a lot of people.  There's something very comforting about using your investments to develop a reliable stream of income.  I worry about a couple of things though;

1) A lot of people are treating high dividend stocks (many of which are growers) like the new passbook savings account, because dividend yields are higher than what banks are paying - and in many cases, higher than a 30 year T bond. This influx of money has pumped up prices so that these stocks are likely to be over-valued compared to non- or low-dividend payers.

2) I'm not sure that there is any such thing as a long-term advantage in the stock market.  If you know about it so do lots of other people...any gains will be arbitraged away.  Consider small cap stocks for example...historically they've outperformed the rest of the market, but now that everyone knows about it, I bet that will no longer be the case going forward.

[MachineGhost]

2) I'm not sure that there is any such thing as a long-term advantage in the stock market.  If you know about it so do lots of other people...any gains will be arbitraged away.  Consider small cap stocks for example...historically they've outperformed the rest of the market, but now that everyone knows about it, I bet that will no longer be the case going forward.

Yep, the private market is where the new equity bubble is formenting and private companies are waiting so long and IPOing so large (due to Sarbanese-Oxley), that they're completely skipping the small cap stage and debutting as mid to large cap.  You can't buy the equivalent of Microsoft's tiny IPO in the public markets anymore.  LendingClub was an instant large cap.  So you better believe Ma and Pa are ultimately going to be creating a private equity bubble when they get permission later this year.  A few public mutual fund companies are already investing in late-stage pre-IPO private companies out of sheer desparation to maintain growth.

The $64K question in keeping with the core PP philosophy is how to get total and equal agnostic exposure to all aspects of the public equity marketplace without a bias?  Marketcap weighting is a mega or large tilt and its a bad one that drags down index returns for the same behavorial reasons adding new stocks to the Dow or S&P500 underperform going forward.

[sophie]

Russell 3000?

Not sure what else you can do with making things really complex.

[hoost]

So you're looking to buy an ETF?

If you wanted to DIY, I'd think your best bet would be to get a list such as the Dividend Aristocrats, then perform a shareholder yield type analysis on those to find the highest yielding (lowest price).  Use 5yr avg Free cash flow (calculated yourself) and market cap to figure out your return.  Also filter out based on debt load and cash position, as well as qualitatives like do they have a strong brand, are they market leaders, etc.

Otherwise, stick to broad index funds.

[MachineGhost]

Russell 3000?

Not sure what else you can do with making things really complex.

Oops, I went of topic there!  I've replied here: http://gyroscopicinvesting.com/forum/va ... #msg116863

[MachineGhost]

Hmm...

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[MachineGhost]

The latest (4th) edition of What Works on Wall Street contains a lot of discussion and data comparing the two.  I still prefer dividend yield, because I think buyback yield can be used by management to crank up the value of their options compensation. 

So whats the bottom line?  I do think Shareholder Yield will turn out to be Bubblicious in hindsight.

[mathjak107]

compounding on investor money is the key to growing money.

a penny doubled and compounded every day for only 31 days is over 10 million bucks . such is the power of compounding.

what is interesting is dividends have increased to the highest levels since 1998 with a record increase of 17.8 billion dollars in increased dividends payed out just 1st quarter.. it is higher now going into the 4th quarter than ever before .

all dow stocks pay dividends and 84% of the s&p 500 does too.

but according to a study done by howard silverblatt at s&p those dividends have been coming at a price as they go up and up..

a good part of that capital from free cash flow is gone forever and no longer available for compounding.

mid-caps and small caps who pay little in dividends have been far and away providing far better compounding and use of investor money for much greater returns..

in fact one of the least efficient ways to grow investor money now is paying it out as a dividend.

free cash flow in a company can be used to compound by buying back its own stock, investing in its own company or buying other companies . cash flow paid out as dividends loses its compounding ability and much of it is gone forever and can no longer compound.

many of the great companies in the s&p 500 have lagged behind their non dividend payers in the midcap and small cap markets who now seem to be much more efficient at generating compounding on investor money.

midcaps and small caps have compounded the last 6 years at rate of 5-6% higher then their dividend paying cousins. 2014 being the exception when the s&p was the oly game in town .


by itself dividends do not do anything you can't do just selling off the same dollars from a portfolio to match .

most folks do not realize gains are based on your starting value each quarter.

they think if they reinvest the dividends  more shares is doing something extra for them but the value before and after payment is pretty much the same if you reinvest. finra rules require the dollars equal the same thing before and after payment as bids are reduced by law the next opening .

being at the starting gate each quarter with more shares at a lower price is the same value as less shares at a higher price. when the opening bell rings market action takes them off and running for the next quarter with the same starting value.


gains are compound off starting and ending values each quarter or yearly if you want to figure that way.

what percentage of dividends and capital appreciation that return is made up of doesn't matter.

a 9% average return whether 9% capital appreciation or 6% capital appreciation and 3% reinvested dividend has the same value in either case.


so if a bunch of dividends paid out from a bunch of dividend payers  come to 4% and the total return was 8% . the same money in a portfolio with no dividends paid that had an 8% total return could sell 4% equally from the pie maintaining allocations and be no different .

[dualstow]

compounding on investor money is the key to growing money.

a penny doubled and compounded every day for only 31 days is over 10 million bucks . such is the power of compounding.

Of course, the tricky part is that after a few of those operations, you're no longer doubling anything close to a penny. You're doubling tens of millions of them. 

[MachineGhost]

I've since concluded Shareholder Yield is a scam, or rather stock buybacks are.

Corporations are borrowing trillions in high yield debt at record low rates thanks to the Fed all merely to prop up their SICKENINGLY OVERVALUED share prices all for the mirage of higher earnings per share.

It's all going to end very badly.  This is just another investment fad that will pass into history like all the others.  Steer clear.