There can be earnings surprises (in both directions).  With bond funds, the coupons vary with the economic winds.  Stock dividends usually increase, but not always.  Also, isn't taxation also an issue re: dividends vs. bond coupons for those who hold assets in a taxable account?

 In reality, there is no "gravy train," only the yields available in the market, whether they be bonds, stock dividends, appreciation or CG's (and a few more exotic sources of market income).  What counts is their safety, consistency, and their placement in various accounts for minimizing taxation.

Greg

In reality, there is no "gravy train," only the yields available in the market, whether they be bonds, stock dividends, appreciation or CG's (and a few more exotic sources of market income).  What counts is their safety, consistency, and their placement in various accounts for minimizing taxation.

Greg,

Well said. 

helmut 

Ken,

"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 sure what your point is.  The total return you get from any investment is the sum of all dividends you receive, while holding the asset, plus/minus any capital gains/losses on your investment based on your purchase and sale price.  Nothing more, nothing less.

"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."

Well, yes.  You did make an investment.  And, from the point in time whenever the sum total of all dividends your receive from the company equals your initial investment, you are on a gravy train, in that your total return will be greater then zero!

You have two companys.  One pays a 6% dividend and has a 4% dividend growth rate.  The second has a 10% dividend with no dividend growth.  Both have an expected total return of 10%.  Which would you rather own?

Next, if you are Josh Peters, and expect your investments in individual stocks to return only 8%, then both of the above might be potential candidates for your portfolio.  Each has a 2% 'slop factor' built in.  Are you more comfortable with that slop factor being 2% in current dividend or in expected dividend growth?

Remember, of course, that to get dividend growth, you have to have earnings growth, while to maintain a current dividend with no growth, only stable earnings are necessary.

El Lobo... the situation is much  more complicated than you suggest.

Company A- 6% dividend yield, 4% growth
Company B- 10% dividend yield, 0% growth

If nothing changes, in 13 years the dividend income for Company A will be larger than the dividend for Company B... even though the yield for Company A will still be less than the yield for company B.

Looking at the percent of dividend cut as a function of dividend yield, we see the risk of the dividend being cut is almost 50% more for a company yielding 10% than a company yielding 6%. By this measure Company B is riskier, despite the fact that it requires no growth.  I think the point is that Company B must maintain its earnings without growth.

There is a definite advantage to larger current yield--larger initial income.  But growth is also important because inflation is eating away at the income. 

The formula that Josh Peters uses is an oversimplification.  That does not make it useless...

Nevertheless, I prefer to compare Company C to Companies A and B

Company C: dividend yield 4%, dividend growth 15%. 

Still 6 years until the dividend income from Company C equals that of Company A.  I think C also comes with less risk of dividend cut; one of my larger worries.  Hard times for company C means slower growth, hard times for Company B means dividend cut.

Thats the way this pre-retiree looks at it.  After retirement I may come around to your way of thinking, but for now...

Best
Stats

Stats,

Some good thoughts.  Does your 13 year number assume anything with regard to the 4% 'excess' dividend yield of company B over that of A?  That is, do you assume compounding?

Next, consider this.  Company B with a 10% yield, catches fire with the market, so share price doubles.  Paying same amount of dividend, yield now falls to 5%.

Does this make the probability of a dividend cut LESS then Company A, with it's 6% yield?

Also, company A, with it's 4% dividend growth rate, needed to maintain that growth rate to match the yield of  company B in 13 years.  If earnings don't grow, neither will the dividend.  If earnings for company B don't grow, that probably wouldn't be a reason for the company to cut it's dividend, but it should still yield 10%.  The point is that almost ALL companies stop growing at some point in time, so one in the hand might be worth two in the bush, so to speak!

In my view, earnings/dividends grow, are steady, or decline.  This is the over the lifetime of a company.  Relying on growth for a good portion of one's return seems a bit more risky to me then relying only on steady cash flows.

In fact, a SMALL high dividend yield company may be less risky, from this standpoint, then a large high dividend yield company!

ElLobo:

Does your 13 year number assume anything with regard to the 4% 'excess' dividend yield of company B over that of A?  That is, do you assume compounding?

El Lobo... yes, I was using compounding.  If the dividend is growing each year by some amount then over time it will eventually be worth more than the dividend of Company B with no growth.  That is the nature of the thing.

The way I see it, say a utility with very little growth but high dividend yield provides cash now.  But over time because it has very little growth the income it throws off will lose to inflation.  This makes this type of investment good for income but not for an entire portfolio.

A company that is growing its dividend at a very fast pace, say JNJ (Johnson&Johnson) could very well pay out more income in 15 years than one of these high yielders today.  Of course, JNJ must keep growing like they did back in the seventies, eighties, and nineties.

I think you see risk in trusting the company to continue growing so fast.  One of those bird in the hand is better than two in the bush kind of thing.  I think a portfolio should be made up of both types of investments.

Stats

Stats, what about the compounding effect of taking the 4% difference (between the 10% high yielder and the 6% payer) and re-investing that amount in the 10% yielder stock?  If you do that - and nothing else changes (which, of course, never happens) - then the '6% payer & 4 % grower' never catches up to the 10% high yielder.  I think.

Regardless, I certainly agree with (and practice) the concept of a portfolio made up of both types of investments - very high payers who may not grow much and reasonably high payers who grow quite nicely. 

Regards.

Cliff

This post was editted to correct an error.

There are billions of scenarios... how about we take 5% income and reinvest the rest. 

I think I have confused Company A with Company B above.  In this post, 
     Company A-- 10% yield with no growth
     Company B--  6% with 4% growth

Then both companies are giving us 5% income each year.  Company A grows at 5% a year because we are reinvesting. 

Company B produces 5% income also, we reinvest 1% and the stock grows by 4%.  At the end of year 1, we have the same amount of income and the same value of stock.

Here is a table of the first ten years of values.