01-27-2014, 11:45 PM
(01-27-2014, 08:12 PM)hendi_alex Wrote: I'm saying that it doesn't matter where the cash flow comes from. Whether it comes from selling appreciated shares or comes from dividends is irrelevant. But, as expressed earlier, dividends do IMO have an advantage in down markets. That key difference is why most of my holdings are in fact dividend stocks. However, IMO, the love of dividend stocks should not preclude someone from allocating some weighting to growth stocks which will likely perform better over the long haul.
A retired investor who has the right risk profile may very well be better off with a portfolio which has an emphasis on growth stocks, or at least one where dividend yield is only a minor consideration. One must keep in mind that the main reason that growth stocks pay far less in dividends is because reinvesting in the business is the smartest and best use for that cash. The biggest total return will always come from companies with the greatest sales and earnings growth. The paying of dividends takes away from that effort and therefore hurts overall performance, except in more mature companies which can't find a productive home for the cash.
There is so much data that says you are wrong, but ok.
"Whether it comes from selling appreciated shares or comes from dividends is irrelevant." So not true no matter how much you think that. End up with a few down years in a row and if you are using pure capital you are screwed.
"One must keep in mind that the main reason that growth stocks pay far less in dividends is because reinvesting in the business is the smartest and best use for that cash." An assumption that is not always true.
"The biggest total return will always come from companies with the greatest sales and earnings growth." Always? Pretty big stretch. You might want to reread the part of The Future for Investors about the growth trap.
"However, IMO, the love of dividend stocks should not preclude someone from allocating some weighting to growth stocks..." Nobody said that so why bring it up. I think pretty much anyone you would ask here already agrees with the point of some growth stocks is a good thing.
But you are trying to speak both sides of the argument. You believe that where income cash-flow comes from does not matter when clearly it does. Having to sell to cover all your expenses with a bad down year, a few down years, or even a few flat years in a row is a journey to hoping you die before running out of money.
Typically growth stocks are obviously already known and their PEs are high. The return of high PE stocks over time is lower than that of lower PE stocks. The returns of non and low dividend payers is typically lower than that of higher dividend payers. Stocks for the Long Run has five decades of data to back this.
For example, the S&P500 broke into quintiles from 1957 to 2006 shows that the highest dividend payers had a annual compound growth rate of 14.22% compared to 9.69% of the lowest / non dividend payers.
The stocks in the quintile with the lowest PE ratios compounded at 14.3% for those five decades while the stocks in the "middle" range of the PE ratios were down to 11.11% per year. The highest PE stocks returned 8.90% compounded per year.
Really, the best way to play growth stocks is to be there before people find them. The high PEs mean one of two things - people already found them so the price has already been run up and thus, you miss much of the return. Or, the stock in question just barely started making a tiny profit and was priced high due to people's anticipation of this occurring. I suppose you could add that if your "growth" portion was focused on the small cap sector then you are probably going to be ok, but even then you can still have several years in a row of low or negative performance that murders the principle.
The beta on the highest yielders is 0.9 while the beta on the lowest quintile pe stocks is 0.63. Higher return for boring, lower pe dividend payers with less risk.