Laddering Muni Bonds vs Muni Bond Fund

[Peregrine Maitland]

If one wanted to were to look for steady tax-free income in retirement,
which would offer the better promise of steady, inflation protected income:
laddering single-state muni bonds or a single state muni bond fund?

Peregrine Maitland

 

[Elle]

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.

 

[MATTY]

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

 

[Will Trice]

Elle wrote:


NO inflation protection there

Elle makes a valid point. Why do you disagree?

-Will

 

[MATTY]

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.

 

[Elle]

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.

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.

 

[MATTY]

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.

 

[Elle]

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.

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.

 

[MATTY]

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.

 

[Elle]

"MATTY" wrote
Re the paying of dividends:

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.

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?

 

[jIM]

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.

 

[Elle]

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

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

 

[joetaxpayer]

"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%.

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

 

[Elle]

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)

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.

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?

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.

 

[Will Trice]

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?

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

 

[MATTY]

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?

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.

 

[joetaxpayer]

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).

 

[rick++]

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?

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.

 

[jIM]

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.

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).

 

[Elle]

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).

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.