Fed Working Paper - 40% of real corporate profit growth after 1989 was fueled by a decline of interest rates and corporate tax cuts.

[resjudicata]

@unitedwestand000000 Dividends and interest are a great plan for a Traditional IRA.

I agree on a taxable account you want tax-managed funds, not dividend funds.

 

[rubym]

@paladius The crowd is never going tp to learn all that, it's not happening.

 

[daniellea]

@paladius I think it's even worse.

1. Smolyansky is not talking about rates rising but just about having no further to fall. A real, long term rise would be a whole 'nother kettle of fish.
2. Even dividend paying stocks have had their PE inflated, because tax and interest made them more profitable too (edit: specifically, policy changes created artificial, windfall dividend growth, which boosted apparent returns via your very sensible Gordon Equation of Return=Dividend+DivGrowth. For example, a nice fund like SCHD pays 3.8%, but it experienced something like 6% real dividend growth for the past decade, so it was priced as though it yielded 10%).

But, yeah, a stock that pays 3% and has real dividend growth at the rate of GDP growth might be looking pretty good.

 

[paladius]

@daniellea A whole generation of investors is about to get re-acquainted with the fundamentals of finance and the Gordon equation.

 

[jsmith116]

@paladius Chasing dividends will consume so much of your time, and the gain will be negligible if any. Most likely the market will beat you, and continue to beat you, year after year, recession or not.

 

[paladius]

@jsmith116 Who's chasing dividend yields? The Gordon equation is simple:

Expected return = dividend yield % + dividend growth %

You don't need a 6% or 8% dividend yield to invest wisely. A company can give even a 1% dividend yield, provided that yield grows fast enough. IMHO 3%-4% is good enough and realistic enough, that the company can grow its dividends sustainably.

 

[jsmith116]

@paladius A company can also change its dividend payout at any moment. So one drops off, you gotta replace it. Not to mention, they are going to go through a slump, the stock is down, then they pull the dividend entirely. Now you’re left with a stock that’s down, and no more dividends. Your options being now 1. Sell at a loss and reinvest or 2. Hold and hope for the reestablishment of the dividend

 

[daniellea]

@jsmith116 Or you invest in a dividend fund that puts its money into a basket of 100 big, steady dividend paying corporations.

 

[jsmith116]

@daniellea You’re basically looking at gains of “only” dividends, which if you’re lucky, will get you 4% per year. More likely, you will get that 4% of dividends, and your dividend stocks are down 4% in the same year, leaving you at a nice +$0.

Here’s your dividend stock:

https://imgur.com/5dg9avo

Another:

https://imgur.com/WOeHit0

And here’s the SPY

https://imgur.com/AzoJoBW

Who’s winning

 

[daniellea]

@jsmith116 A simple rejoinder is "Look, the div fund might be a bargain now, but SPY is in a bubble."

You're contrasting a dividend fund over a 1 year period to the US SPY. This is also a 7.7% extreme fund, not a conservative 4% big-cap fund. Comparing apples to rubber chickens.
(edit: oops, not a global fund, but a US fund)

But more importantly, this has nothing to to do with your refutable claim that you have to keep buying and dropping stocks to get dividends. Nonsense. You just get a fund. Or buy big boring stocks that have paid dividends consistently. So it's a non-sequitur.

Over the past decade SCHD has about matched SPY in total returns.

The lesson from this paper is "Don't buy anything with unrealistic growth priced in, especially if it implicitly assumes continuing interest rate and tax cuts." Now it could be that dividend stocks also have unrealistic growth cooked into the price, because SCHD increased its dividends by 6% per year, and those days might be over, just like SPY might not keep going up and up the way it used to. The question is "which one makes more of dangerous assumptions about continuing growth?"

It's kind of funny how dividend investors get active hostility (downvotes), when in fact their performance was pretty similar over the past boom decade (SCHD +11.62% per annum; SPY +12.63), and we haven't seen a bust decade in a long time.

 

[jsmith116]

@daniellea You know that the stocks that have dividends are also in other funds? And “dividend-targeting-funds” merely pick stocks that have a dividend, meaning some people are not holding these for the dividend but for the stock value itself.

People are “hostile” towards your investment strategy because it’s non-optimal and falls to the same risks as regular old fund investing, except now you’ve added stress, more hidden switches like dividend changes, and lowered returns albeit slightly.

It’s easier to just throw it in an index rather than dividends, for higher return.

 

[daniellea]

@jsmith116

You know that the stocks that have dividends are also in other funds?

Of course. SPY pays a dividend. It's a matter of emphasis.

because it’s non-optimal and falls to the same risks as regular old fund investing

More stress to whom?

Look, the more people like me buy dividend stocks, the more TSLA and AMZN there is for you.

 

[jenndiver09]

@paladius What you’re referring to are economic shocks that have been researched. It is known that cash flow shocks(recessions) tend to drive value down relative to growth and increases in discount rates will drive up value relative to growth. It’s also been shown that increase in risk(defined as variance in volatility) benefits growth.

Hate on “dividends are irrelevant” crowd all you like it doesn’t make them wrong. Academic study’s and mathematics/accounting in general are well on the side of the “dividends are irrelevant” crowd.

Interesting read if you want to see the study.

If you want to be rational and fundamental about investing you focus on firm characteristics/risk factors.

GGM and DDM are REALLY about expected future cash flows. Sure dividends are in the name and they make the equation easier but they’re basic relative to Fama French 5 factor model which doesn’t even mention dividends.

 

[nattyz]

@daniellea Feels a little too simplistic to assume companies don’t reinvest the windfall from lower taxes and interest rates, or use that buffer to be more competitive in going after revenue, and thereby lead to the benefit getting competed away or compounding at a given rate of return over time. Which I think is part of what informs the Greenwald conclusion they contradict.

That said, idk if either view reveals any underlying strategy or bias that could lead to outsized returns alone.

 

[daniellea]

@nattyz

to assume companies don’t reinvest the windfall from lower taxes and interest rates

Smolyansky doesn't assume this, as far as I can tell.

He's saying that we started with high rates, high taxes around 1989.

Then rates and taxes were cut, boosting profits. Investors said "Hey, companies are doing great - look at that profit growth!" and drove stock prices up, even when that profit growth was driven by non-sustainable policy changes. Ie, they confused transient profit growth (driven by the change in taxes and interest, not the level) with fundamental profit growth (driven by reinvesting).

The amount of extra money available to reinvest is not enough to bridge the gap between true growth and policy-change driven illusory growth.

tl;dr - profit growth was a windfall, not a new steady state. The steady state is a bit higher than before, but not that much higher.

 

[sunshine100]

@daniellea So government spending and low interest rates caused inflation? That checks out

 

[marizzapan]

@sunshine100 Tax cuts, not government spending.

 

[lowpost42]

@marizzapan Among other things. Inflation has been high in other countries as well for a whole host of reasons

 

[jimspirit]

@lowpost42 And what are those reasons? May I know it? If only it were possible. I want to have even a little knowledge.

 

[lowpost42]

@jimspirit Supply shortages. Invasion of Ukraine, chief among them.