
The Dividend Disconnect [pdf] - samclemens
https://poseidon01.ssrn.com/delivery.php?ID=777119081090114126122000124065075029117046025068004010066117110028007110104103120119029035055009008044005104106113112024015121106071060023014127067099070105081081028031052051113069119100025111021096066085097114102073127020000091092087080004070092018094&EXT=pdf
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chollida1
> Investors hold dividend-paying stocks longer, and are less sensitive to
> price changes, consistent with dividends being valued as a separate
> desirable attribute of stocks. The demand for dividend-paying stocks is
> higher when interest rates and recent market returns are lower, consistent
> with investors comparing dividends to other income streams and capital
> gains.

Hasn't this been know for, well, ever? I mean as people retire it's been
historically common to start moving into dividend paying stocks to provide
income for them. I think most people understand that moving to dividend paying
stocks means giving up some upside on the stock movement in return for the
income and perceived stability of these stocks.

And dividend paying stocks tend to be big blue chip firms traditionally so the
flight to them when markets are rough is again, almost a reflexive move that's
been happening forever.

> This leads to predictable marketwide price increases on days of large
> aggregate dividend payouts, including stocks not paying dividends.

Well there goes that trading signal:(

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dragthor
Personally, I am a bond guy.

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sqeaky
Bond guy, James bond guy.

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anonu
> This leads to predictable marketwide price increases on days of large
> aggregate dividend payouts

That's the biggest takeaway for me - and something I'd backtest separately to
confirm.

In a finance class I took many many years ago, we were taught about the
Modigliani Miller "Dividend Irrelevance Theory"...which basically says that
you, as an investor, shouldn't care whether you get a dividend or not. But if
we've learnt anything from the past year or so, in low interest rate
environments, yield is everything. Money now is better than money later.

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prewett
I looked up the Modigliani-Miller theorem, and the first thing wikipedia said
was "in the absence of taxes, bankruptcy costs, agency costs, and asymmetric
information, and in an efficient market, the value of a firm is unaffected by
how that firm is financed." So basically the theorem is irrelevant, because
none of those assumptions apply. We do have bankruptcy costs, agency costs,
asymmetric information, and an inefficient market.

I think more important than yield in low interest rate environments is that
dividends are generally pretty reliable, as opposed to price appreciation,
which is not. A long history of increasing dividends shows a strong underlying
business model and history of execution. Furthermore, for mature companies,
there is only so much money you can productively employ; retaining money that
you cannot use effectively reduces shareholder returns. Conversely, you
shouldn't be paying dividends if you are entering an Amazon winner-take-all
market because you need it to grow. So you really should care about dividends.

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lintiness
the "tax" part is obviously important (dividends are taxed while unrealized
gains are free until security is liquidated). what most people ignore when
doing these types of analyses is that a bird in hand is worth two in the bush:
your risk of loss in the non-dividend payer is always 100% whereas your risk
of loss in the one with the historical income stream is price - dividends
received.

