I have held Ford stock (yes I know bad on me for having an individual stock) for 8 years. When I purchased the stock in 2016, the cost was 200 shares for 11.15/share, 300 shares for $11.82/share and then 500 shares for $12.52/share. Today's share price 8 years later is $12.16/share. That means in 8 years my total return based on share price is $121. This comes down to about a 0.99% return in 8 years. Bernstein in his "Four Pillars of Investing Book", makes the case that your expected returns, are really about dividends.
Now as it turns out I was reinvesting all dividends. Over 8 years the dividends produced an additional 398 shares of stock at various prices. But this means the dividend return at today's price of $12.16/share comes to $4841 in returns. This means my total 8 year return was 39.8%, which is roughly 4.97%/year (not quite since that is the arithmetic not geometric mean).
This seems to exemplify the case Bernstein was making that expected returns are all about dividends and dividend growth (The Gordon Equation). While Ford stock price is barely above my initial purchase price, the real gains all came from the dividends.
Now Bernstein makes the case in his book that since Meta has no dividend, if it goes toes up, the investor is left with an empty bag. While if a dividend producing stock becomes extinct, the investor still received the dividend. But this seems to beg the question, should dividends be reinvested into the same positions that generated them? If the dividends are reinvested to buy more shares, and the company dies, then both the original and new dividend produced shares are lost. In which case the realized return would be the same as a stock (e.g. Meta) which produces no dividends.
I would be curious to know if Bernstein then recommends not reinvesting dividends into equities, but reallocating them to bonds. Otherwise, it seems the person investing in shares with dividends, has the same risk as the person investing in shares without dividends. Since Bernstein does not share his email address, I thought I would put this out here for comment.
As a corollary of this, it gives an example of the power of reinvesting dividends in bond funds. Several years ago, Vanguard put out a white paper on the superiority of bond funds to individual bonds which results from immediate reinvestment of bond dividends back into the fund. Individual bonds throw off cash that must accumulate to a large enough amount to purchase new bonds, while even small dividends are put back to work immediately in bond funds. I did not see Bernstein address this factor in his discussion of bonds vs bond funds.
Now as it turns out I was reinvesting all dividends. Over 8 years the dividends produced an additional 398 shares of stock at various prices. But this means the dividend return at today's price of $12.16/share comes to $4841 in returns. This means my total 8 year return was 39.8%, which is roughly 4.97%/year (not quite since that is the arithmetic not geometric mean).
This seems to exemplify the case Bernstein was making that expected returns are all about dividends and dividend growth (The Gordon Equation). While Ford stock price is barely above my initial purchase price, the real gains all came from the dividends.
Now Bernstein makes the case in his book that since Meta has no dividend, if it goes toes up, the investor is left with an empty bag. While if a dividend producing stock becomes extinct, the investor still received the dividend. But this seems to beg the question, should dividends be reinvested into the same positions that generated them? If the dividends are reinvested to buy more shares, and the company dies, then both the original and new dividend produced shares are lost. In which case the realized return would be the same as a stock (e.g. Meta) which produces no dividends.
I would be curious to know if Bernstein then recommends not reinvesting dividends into equities, but reallocating them to bonds. Otherwise, it seems the person investing in shares with dividends, has the same risk as the person investing in shares without dividends. Since Bernstein does not share his email address, I thought I would put this out here for comment.
As a corollary of this, it gives an example of the power of reinvesting dividends in bond funds. Several years ago, Vanguard put out a white paper on the superiority of bond funds to individual bonds which results from immediate reinvestment of bond dividends back into the fund. Individual bonds throw off cash that must accumulate to a large enough amount to purchase new bonds, while even small dividends are put back to work immediately in bond funds. I did not see Bernstein address this factor in his discussion of bonds vs bond funds.
Statistics: Posted by sjohn_az — Mon May 27, 2024 3:00 pm — Replies 0 — Views 234