Laddering Muni Bonds vs Muni Bond Fund

Why do you think municipal bonds offer inflation protection?

As far as returns, I would expect the ladder to do a little better than the fund, in general, because of the expenses that attach to fund management. But with a ladder, one will have diversification concerns. One needs to have a large enough collection of high grade, individual bonds to be able to sleep at night, should a municipality(ies) be unable to pay back the bond(s).

Are you sure the effective yield of such tax free assets really trumps the taxable alternatives? Are you bearing in mind that many stocks now pay qualified dividends, on which most people pay only a 15% tax? Older, large cap, dividend paying companies are an excellent hedge against inflation, since (1) dividends tend to increase much faster than inflation, like 10% a year on average; and (2) share price also tends to grow over long periods.

NO inflation protection there

Elle makes a valid point. Why do you disagree?

-Will

was refering to the municipal bonds not having any inflation protection. As far as the dividend stocks we already discussed the dividends themselves in another topic here as being merely a wash as far as being a true gain, but agreed for whatever mysterious reason dividend paying stocks do tend to out perform but not because the dividend itself gives you anything.

"MATTY" wrote

What do you mean by "true gain"? For people in retirement who need income, the dividends from stocks I described are an excellent hedge against inflation. For people not in retirement, of course a nice dividend that increases quite fast and is regularly reinvested compounds growth of principal very nicely. Dividends give an investor a lot.

We already had a big long topic discussion on it here but a stock dividend is basically a non event,its a wash. The exchanges adjust all the prices downward by the amount of the payout making the net gain from the payout a wash. You may have a dollar in dividends but your stock price was adjust downward by the same buck. Yes there are other reasons a dividend paying stock my out perform but its not the dividend payout thats giving you an extra bonus like bank interest or a money market does.

"MATTY" wrote

Not so. It is common for an individual stock to actually close at a higher price on the ex-dividend date compared to the previous date. This is simply due to the market pricing the stock higher for xyz reasons, unrelated to a dividend distribution. Fact is stock prices tend to rise over the long run regardless of dividend payouts.

The paying of dividends is not a wash; it's the use of some, but not all, earnings to reward etc. shareholders. Some shareholders take the dividends and plow them back into buying more shares. In the alternative companies may plow all earnings back into the company. This also might reward shareholders, but not as immediately.

I do not contend that all dividend stocks "outperform" over the long run, so please do not expect me to defend a position I do not hold. I have already made my point about the virtues of using dividends for income in retirement. If you have an objection to this point, please offer it.

Yes it is possible and usually the case for the stock to close up or down on the ex dividend date as normal trading always covers up the programmed drop of the dividend payment. But the stock may have been that dollar higher at the close if it didnt pay out that doller .

giving someone a dollar and taking it back immeadiatly in the share price at the open isnt my idea of a positive or a negative gain.

both amex and the nyse must take all buy orders and lower them automatically by the same amount of the dividend when the market opens.

======================================= MODERATOR'S COMMENT: Please trim the post to which you are responding. "Trim" means that except for a FEW lines to add context, the previous post is deleted.

"MATTY" wrote Re the paying of dividends:

I cannot see how this literally instantaneous snapshot of a company's value is of any use. Without dividends, the S&P

500's annual return since 1871 averages 5.6%. With dividends, the return is over 10%. Do you understand that companies exist to make earnings? That earnings are a gain for the company, not a loss? That since dividends come from earnings, dividends denote a gain for the investor?

BTW, you said you had recently had this discussion here in another thread. But the archives for MIFP show that this is the first thread where a "MATTY" has participated. Are you confusing this newsgroup with another?

google groups profile shows Matty has posted to other threads in this group.

"jIM" wrote

Oops. I should have written that this thread is the first I could find in this newsgroup where "MATTY" mentions dividends.

Elle, Matty, I think you are circling around the same issue here. If one were to group 'dividend paying stocks' from the non-payers, there would be a bit of a skew toward larger cap stocks of mature companies. So comparing their long term returns would be a tough exercise (you'd first have to find groups of companies with similar market caps to make a fair side by side comparison, I'd think)

Elle, I agree with you, and was going to reply to the OP in a similar vein, suggesting DVY as an alternative (to the bonds). Matty is suggesting that dividends are a zero-sum situation, citing that the day a stock goes ex-div, it's price for that moment drops by the dividend. Matty could also have noted that Berkshire Hathaway has never issued a dividend, and has been trading at a gabillion dollars lately (well, $99,390 as of today). No one can argue it was a bad stock for the lack of dividends.

There are those who feel that dividends or stock buy backs are a company's way of saying "we don't know how to invest this extra cash, so here, take it." Don't companies all need to invest for their own growth? JOE

"joetaxpayer" wrote

I think the distinction between growth (generally no dividends) and value (generally a nice dividend) stocks is so commonly discussed and studied that it's an easy enough exercise to compare returns or find online sources that do. Regardless, I am not arguing that value stocks outperform growth stocks, because there are a lot of ways or time periods to measure that and I am not interested in that minutiae. I am saying value stocks do well, and this may be sound-bite attributed to dividends.

I am still left guessing as to what Matty's point is, other than he insists on the one hand that dividends make no difference (in that instant of the day when they're "officially" paid, I guess), but then seems to admit that dividend paying stocks do well.

I think the debate over "value vs. growth" stocks is much repeated on the net. So I won't initiate or join such a debate here. As a point of information, I will add that dividend paying companies do not generally take all earnings and pay them out as dividends. The popular stock metric "dividend payout ratio" takes dividends per share and divides by earnings per share. I suppose the ratio tends to be close to around 50% for large cap "value" companies, from my general study.

Some of the most successful investors have stated that dividends, and particularly increasing dividends, are a positive attribute for investing in a particular company [e.g. Benjamin Graham (as Elle has pointed out here in the past) and Peter Lynch]. This is usually given with the caveat that the payout ratio is not too high, thus addressing your other point above.

-Will

Somehow my post never posted so i may end up with 2 replys .

i think we got a little off base here, study after study seems to always show as a group dividend paying stocks seem to out perform ,thats not a question.

my point is that the dividends themselves are a zero sum . the stock is adjusted downward by the same amount so nothing gained nothing lost.

there are quite a few reasons people like dividend paying stocks but they are more pschological then really based on any gain from the dividend itself. one of which is that most people think of a dividend as a gain like bank interest where its not a zero sum event. its not the same thing yet i think if you ask most uninformed people about dividends they will tell you how their dividends are like when they get bank interest, they just have no clue how it works.

30% of the s&p gains have been dividends but i cant help but wonder how much of that 3-% would still be intact or even exceeded if the companies didnt pay a dividend and give away company assets every quarter.

couldnt we all just sell 2-4% of our holdings anyway every year and create the same effect.

This was what I was attempting to get around to. That the Dividend would simply get added back to the value of the stock. Dividend reinvestment would get closer to this scenario, but having no dividend would give the stock owner more control as to when to take gains (and as you say, you can sell a small fraction of holdings each year).

Are their any graphs of of S&P dividends re-investment versus bare index? I heard the claim the S&P already passed its year 2000 peak if you consider the former, but havent seen the actual graph. Sometimes an index mutual fund will have a chart of such.

The day of the dividend, it is a "zero sum" transaction- I do think this is semantics in many respects. If the dividend was reinvested you do have more shares though... so in effect any incremental gain in stock price will benefit more shares which you now own.

If the goal is an income producing portfolio, dividend paying stocks are worth a portion of the portfolio. Bonds, CDs and Money markets are definitely part of equation as well- they yield higher "usually" relative to dividend yield of large cap value stocks (3% yield is a GOOD portfolio for stocks and 4% could be "easily" achieved with a mix of the other instruments).

"joetaxpayer" wrote

Having no dividend may mean the company stores its excess earnings in a relatively low yielding (compared to stocks for the long run) money market account. You (Joe and Matty) do not know that there's a good place for the company to invest the money. I do not think it's simple at all; rather, it's a business decision made by company leaders depending on way more variables than the average shareholder can process competently. It seems like you two are eager to second guess all companies' management's decisions. Also, by ceasing payment of dividends, the company loses the tax advantage of issuing dividends. Note this is another reason why companies pay dividends instead of plowing all the earnings back into the company.

I still disagree with Matty but we already reached the point where we are just repeating ourselves.