tag:blogger.com,1999:blog-7366878066073177705.post6798156292352477862..comments2024-02-09T18:16:45.614+00:00Comments on The Psy-Fi Blog: Dividends Keep You Anchoredtimarrhttp://www.blogger.com/profile/06254802085744425067noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-7366878066073177705.post-66707519563710301972012-04-27T13:15:00.955+01:002012-04-27T13:15:00.955+01:00Hi Stemis
Clickable link here.
It’s an interesti...Hi Stemis<br /><br />Clickable link <a href="%E2%80%9D" rel="nofollow">here.</a><br /><br />It’s an interesting thread. It’s perfectly clear that market growth come from both capital gains and dividends, but as both are eventually a function of earnings growth and any reinvestment of dividends also contributes to an investor’s capital and earnings growth it’s simply not possible to neatly separate them and claim that both are equivalent factors. It’s like trying to unbake a cake.<br /><br />As matter of practical approach the Ibbotson quote is perfectly sensible. Reword this as: “if you don’t reinvest your dividends you won’t make any profits after inflation”. Now apply the same approach to capital gains: “if you don’t reinvest your capital gains you won’t make any profits after inflation”. Absolutely true, but probably not what most investors will do when given a choice between spending dividends and spending capital gains.<br /><br />A better experiment would be to look at the universe of dividend paying stocks and the universe of non-dividend paying stocks and see what the practical difference is. There’s no such study as far as I’m aware but Rob Arnott’s work on <a href="%E2%80%9D" rel="nofollow">clairvoyant value</a> comes close but is sadly mute on dividends. He shows that glamour stocks (which presumably pay low or no dividends) grow at twice the rate of value stocks. Proof that capital gains is the way to go? Sadly not, because investors typically pay four times as much for them as their value cousins. As the evidence here on dividend anchoring shows, the majority of investors find valuing non-dividend paying growth stocks more difficult, and this seems to lead to them losing money on their investments. Therefore, as a practical rule of thumb “re-invest your dividends” is a useful metric. Alongside it should be “and don’t drawdown capital either”, but most people seem to take that for granted.timarrhttps://www.blogger.com/profile/06254802085744425067noreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-21740265549730731482012-04-27T09:22:26.492+01:002012-04-27T09:22:26.492+01:00"Note that nearly all of the real return over...<i>"Note that nearly all of the real return over the period comes from the reinvestment of dividends."</i><br /><br />This is an oft quoted statistic but I think it's incorrect<br /><br />http://boards.fool.co.uk/more-realistic-is-to-view-the-stock-market-as-a-11584783.aspxSteMiSnoreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-65125435315461433122012-04-18T15:39:58.540+01:002012-04-18T15:39:58.540+01:00It's probably not what you intended, but I thi...It's probably not what you intended, but I think the article can be read as more justification for the dividend illusion.<br /><br />The Miller-Modigliani proposition is totally compatible with the "reinvesting dividends matters" meme. Indeed if you do the same exercise with the effect of "reinvesting" the full cash flow (dividend + buy backs + any other way used to pay back investors), the effect is, obviously, reinforced.<br /><br />And it makes sense simply from a company lifecycle viewpoint: growth is only one stage of a company life and during mature stages companies tend (and should) distribute profits, so in aggregate on the market as a whole distributions matter. How the distribution is done is mostly a distraction.cighttp://commentisglee.wordpress.com/noreply@blogger.com