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Bonds, Dividends, and Income Streams
ken250 05-07-2008, 3:42 PM | Post #2515575 |  81 Replies
1  

I'm sure you've all seen or heard that the bond market is highly efficient, why is that?

Essentially, the bond market is highly efficient because the cash flows are basically in stone. The market knows the coupon rate, the face value, and how many payments remain until maturity. These future cash flows are discounted back to the present to arrive at today's price for the bond. Not much room for error here.

Now take a dividend stock.

The process is similar. Investors know the current dividend and earnings growth can be estimated (let's not argue about the precision of earnings estimates). Let's assume the dividend grows at the same rate as earnings, not a bad assumption. The only missing parameter in the determination of the stock's share price is the investor's required return. This can be determined using CAPM with estimates for the risk-free rate and the market's return, or it can be supplied by the investor based on knowledge of his personal situation. While there's more room for error in this case than there is in the bond case a fair estimate of the stock's intrinsic value can be determined. Again, the intrinsic value (ie price) is the sum of the future cash flows discounted back to today.

I think there might be a tendency to forget these things. People may be assuming if they hold a dividend stock forever and it continues to pump out growing dividends at some point in time the process of collecting or reinvesting the dividend becomes a gravy train. Well, it doesn't.

I'm not going to go as far as to claim a dividend is a return of capital, but remember you did pay for every cent in dividends received. 

Good Luck, Ken. 

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Re: DG
DRiP Guy 05-23-2008, 7:48 AM | Post #2520858
0  

meyerr:

 

The questions had nothing to do with religion; they had to do with jabbing little terse pronouncements, with no context or explanation/color whatsoever for readers who cannot directly Grok the internal synapse firings of rather obtuse posters.

 

Fortunately, El Lobo gave some very good information for all four questions I had, and for that I thank him.

 (See how easy that is?)

 

 

Re: DG
DRiP Guy 05-25-2008, 8:13 AM | Post #2521385
0  

 meyerr said:

It is not our job to protect the world from themselves  Just b/c you might ascribe to one of the other investment churches that spout their nonsense around here...

 

Roberta,

 

I'll take the Pepsi challenge if you like as to whether I have spouted 'nonsense' or not.  Take a look at what I've written and tell me what qualifies as 'nonsense', especially against the backdrop of just a few very recent pages sampled from your own over four thousand posts. Personally, I think I will avoid taking investment (or other) advice from someone who is 64 years old, and apparently quite the gambler/daredevil:

I LOVE the penny slots.

I'm going for the margin account.  He's making noises about not liking owing money but I think Bob's information about the increased medicare cost may tip the issue.

04-26-2008, 6:32 AM | Post #2511846 We're going to be buying a new house in the next few years.

05-24-2008, 4:59 AM | Post #2521196 Fasten your seat belts.  We bought a house.  I have to cover margin big time next week.  I'm selling up a storm :-(

I'm much more willing to gamble with 2k or 10k than someone how's hurting b/c of what CD's are paying now.

what I actually buy is quite time dependent.

I'm so frustrated that I'm almost willing to buy an annuity :-(.  Well, not quite.  Maybe just sell everything, go to muni's in taxable and bonds in sheltered.  Won't happen.  I'm too greedy.

I'm using these dividend stocks to replace much of the role of bonds in my portfolio.

All these dividend increases show a shift in thinking and are making me nervous.

I've been using all possible spare cash to buy dividend and financial stocks although my available cash has been very limited this past year or two.

if I needed a nursing home, then SS + 4% probably would be necessary.

As retirees, we can't just wait out a bear market and not sell equities.

I am not sure whether to count my preferred stocks as equities or not.  I think of them as fixed income

I use CEF's to play things like emerging market, junk and mortgage bonds.

I know that when the child who will eventually take over our finances if and/or when there is a need will immediately redo our portfolio b/c he doesn't have the risk tolerance we do.  I thought he would throttle me when he asked for investment advice recently and I suggested financials.




etc etc 

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Re: DG
ElLobo 05-25-2008, 11:06 AM | Post #2521443
0  

DG,

"Fortunately, El Lobo gave some very good information for all four questions I had, and for that I thank him."

So, do YOU believe the size, or magnitude, of the percentage dividend yield of an individual stock is a measure of it's riskiness?  That is, is a 10% yield stock inherently riskier then a 1% yield stock, based SOLELY on those percentages?

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Re: DG
DRiP Guy 05-25-2008, 10:59 PM | Post #2521610
0  

El Lobo asked: "...do YOU believe the size, or magnitude, of the percentage dividend yield of an individual stock is a measure of it's riskiness?  That is, is a 10% yield stock inherently riskier then a 1% yield stock, based SOLELY on those percentages?..."

 No.

Not any more than I believe that white home over there with an entrance 100' from the roadway ought to be worth more than the yellow house with an entrance 75' from the roadway. 

Both the current % yield of a stock and the distance of the doorway from the roadway of a home are parameters of some interest, but neither can be used as an effective surrogate for a more comprehensive analysis of all the fundamentals (the only hope a stock picker has, BTW, but even at that, it is little hope indeed!)

DG 

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Re: DG
ElLobo 05-25-2008, 11:44 PM | Post #2521618
0  

DG,

As you know, I agree, absolutely.  And I had posted the same thoughts several times earlier in this thread.  JWR chimed in, and you started your flame.

Re: DG
DRiP Guy 05-26-2008, 8:10 AM | Post #2521659
0  

Respectfully,

 My 'flame' (such as it was) was expressing frustration with someone who only pokes their head in to utter a few words without explication or context or even the courtesy of  utility (other than apparently for the *poster*?).

I gladly acknowledge that we live in a world full of quirky and varying types, and I laud that variety! Some people, for instance, go on and on and some others are, in contrast, men/women of very few words. However, IMHO, the difference between simple NOISE and SIGNAL is the utility and ability to make use of the input, no matter how lengthy or short. When there is a failure, sometimes the receiving apparatus is the problem, sometimes it's the environment, and sometimes it's the signal source. 

In this instance, I think the multi-year multi-location record will certainly show that attempts to genuinely extract ANYTHING representing what 99% of people would consider as meaningful exchange of information has been consistently stymied, as reported by that hyper-majority.

Thus my attempts to ask for the common human decency to EXPLAIN WTF YOU MEAN WHEN YOU POST in plain terms. To just drop superior-inflected cri du cœur as if they were really bon mots  is les boules.

 

Fin.

 

DG 

 

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