Laddering Muni Bonds vs Muni Bond Fund

It doesn't necessarily sit on the balance sheet as cash...many low- or zero-dividend stocks use other methods of getting rid of excess capital. They can buy back stock, or acquire other companies, in the process increasing the value per share. So *in theory*, the S&P 500 could have achieved the same net return with zero paid to dividends, with the value received purely through capital gains.

That's kind of academic though, and matching the return would require that each company independently allocate its excess capital as efficiently as the market does (highly doubtful). There are plenty of examples of companies that used excess cash for acquisitions that didn't pan out. If those dollars had been paid out to shareholders who could then decide how to re-allocate, argubly they'd end up creating more value.

I personally like the "discipine" and "reduce squandering" rationales for paying dividends. Show me a company with a big pool of cash and no dividend, and I'll show you a Gordon Gekko looking to raid it, or a group of greedy senior execs cooking up "performance bonuses."

-Tad

This is why I wrote "may." Remember the moderation policy precludes lengthy essays in a single post. :-)

I'll say. I wouldn't even say "in theory," because of all the other possible, and as you point out, sometimes nefarious, uses of extra cash.

Ha. But I am actually going to take the above seriously as I evaluate companies. I have been using the converse: Show me a dividend payout ratio over 100% (and they do occur for the short run), and I'll show you a company very likely about to cut its dividend, for one. Though so far, the share prices of the four companies I have owned that cut their dividends all rebounded within a few years. Speaking of using dividends for income that hedges inflation, etc.

"Elle" wrote

On re-examining Shiller's data, I think the above needs correction. Dividend increases for the S&P 500 have averaged about 3.9% a year since 1871. It's been a little better in the last several decades, at around 5.5% a year. Since dividend achieving companies are overwhelmingly large caps like those in the S&P 500, I think all one can say is that using dividends for income has tended to ensure an income that keeps up with inflation, but this income will not thrash inflation.

My head hurts. The next person who posts more mumbo-jumbo on this thread is going to stand in the corner for a week.

-HW "Skip" Weldon Columbia, SC

It's got more bite than that. In addition to the incremental gain in stock price, you also have the next (and all future) dividend payouts handing you more money -- 'cause you now own more shares. It compounds quite nicely.

Not to mention that getting a dividend is like cashing out a few shares with no transaction cost.

Do I have to stand in the corner now?

-Will

but depending on the company and if they have a drip program or your broker charges you you may have to pay to reinvest the dividends

Thank you for your comments . Would your statement about dividends and inflation (above) hold true for, say, residents of NY City whose income is taxed on federal, state and local levels?

Would your earlier comment that "...ladder[ing municipal will do] a little better than the [municipal bond] fund, in general, because of the expenses that attach to fund management" also be generally true when considering ongoing brokerage expenses incurred in the cost of laddering.

TIA

Peregrine Maitland

"Peregrine Maitland" wrote

Yes. It's the growth rate of the income (be it dividends or interest) with which one need be concerned. Bond income is simply not going to keep growing in the long run. Inflation will destroy the value of bond income over the long run of say ten years and more.

This is a good point. I agree one may have to shop around a little and compare mutual fund expense ratios with what your preferred brokerage will charge for the purchase of bonds, in an economically sized amount. Unfortunately, since the yield curve inverted a few months or so ago, it's particularly difficult to make comparisons. On the positive side, at this point the difference in returns (between bond mutual funds and individual bonds) is not likely to be large, if one is judicious. When interest rates were at rock bottom a couple of years ago, I felt differently.

I wrote of S&P 500 dividend achievement earlier. I see I need another amendment. The S&P 500 is about half value stocks (paying a nice dividend) and about half growth stocks (paying no or a small dividend). Investing in an index of strictly large value stocks will improve the dividend achievement of the portfolio by quite a lot. Ten percent or more dividend increases, on average per annum, are common among large value stocks. This rate of dividend increase has thrashed inflation for the long term.