7 responses

  1. Joshy K
    March 29, 2013

    I agree with your premise only in part. If you have a portfolio of Solid Dividend paying stocks that either consistently maintain or grow their dividends, then the fluctuations in the share price does not matter, as the investor gets paid depending on the number of shares he/she holds. For example if an investor holds 10000 shares consisting of 20 stocks ( with as much diversification as possible) and gets $20,0000 paid annually in dividends. if the stocks in the portfolio are stable or growing dividend payers, the investor can expect to receive at least $20,000 in Dividend the next year and beyond. The total portfolio market value may fluctuate from month to month or year to year.
    I have held stocks (worth about $465,000 in 25 positions in one portfolio that I manage for a relative) in 2006 that pays about $21,000 in dividends per year. I have withdrawn $20,000 every year since 2006. The market value of the portfolio is now approximately $500,000 and yielding annual dividends of about $23,000. Therefore, not only my portfolio has grown from $465,000 to $ 500,000, the dividends have also grown from about $21, 000 to $ 23, 000. Yes during this 6 plus years the market value of the portfolio have fluctuated, but the dividend pay have never decreased even one $. This has been essentially a buy and hold investment without any addition to the portfolio.

    I agree with you that while screening for stocks that pay stable or growing dividends, it would also be wise to have as much diversification as possible. Based on a six plus years performance, I believe that it is possible to reap stable or growing income from Dividend paying stocks, if you choose the stocks with some discipline.

  2. My Own Advisor
    March 29, 2013

    Hi Larry, good article, to a point.

    You are assuming some investors are ONLY invested in dividend paying stocks AND in small numbers.

    If I happen to hold a portfolio of 40+ dividend paying stocks, I’m not sure this argument holds true.

    Buffett doesn’t hold this many, and he seems to be doing just fine.

    Mark

  3. Larry Frank, Sr.
    March 29, 2013

    Both good responses. For other reader’s education, I would point out a few things that my blog-site point of view represent:

    1) Picking your own holdings means you are actively managing your “fund” on your own, which is essentially the same as someone else actively managing a mutual fund for multiple investors by picking the fund holdings. http://en.wikipedia.org/wiki/Active_management

    2) My perspective comes from a passive management approach a.k.a.a form of indexing http://en.wikipedia.org/wiki/Passive_management since academic (French/Fama mentioned in blog) and S&P research http://us.spindices.com/resource-center/thought-leadership/spiva/ suggests that persistence (see persistence report) is a problem with active management.

    3) Persistence is important because retirees need to depend on having a source of income throughout their life in all forms of market and economic times with risks spread very broadly; rather than what seems to work for short periods of time. Research can separate timing effects and identify skill vs luck. http://www.dimensional.com/famafrench/2010/10/qa-when-does-active-management-shine.html (disclosure: I use DFA managed funds with clients who want portfolio management). Forum is available elsewhere, like http://www.moneyscience.com/pg/newsfeeds/Admin/feed/2344/blog-fama-french-forum , however tends not to include their earlier posts.

    4) Relying on just one type of income ignores the other types of income that are also possible … a Total Return approach recognizes all sources of spendable money http://en.wikipedia.org/wiki/Total_return which may become important especially in older retirement ages when they can spend some principal (and gains) because expected longevity is shorter.

    Are there other philosophical points of view? Yes. My blog in general expresses the philosophical approach of Total Return combined with passive management based on academic and peer reviewed research. This disctinction is important for those who choose NOT to manage their money on their own.

  4. Larry Frank, Sr.
    March 30, 2013

    A lot of the comments I’m getting to this blog, via the Ask Larry link, are also getting the “destination” (your goal) consfused with the “fuel” (investing) for the “plan” (how you connect where you are to your goal).

    To unravel the differences between those please see this blog:
    http://blog.betterfinancialeducation.com/behavior-corner/im-a-planner-not-a-prophet/

  5. Larry Frank, Sr.
    April 17, 2013
  6. Larry Frank, Sr.
    May 2, 2013

    Comments for this post have been deactivated.

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