The Long Term Investor

I just looked at charts of the SP500 and the DOW......both averages at this moment.......are ABOVE where they were just BEFORE the BIG DROP........the begining of the dreaded correction. NEVER-MIND.

Yeah TireSmoke......the museum does do some raffles that have tickets for about $20....but they are usually unlimited ticket sales. I really like their raffles that cost from $150 to $250 per ticket that are limited to 1000 to 1500 tickets. I know a lot of people like to buy lottery tickets and scratch tickets with odds in the millions. They would be much better off to just buy a couple of these CORVETTE tickets a year and have odds of 1000 to 1 or 1500 to 1. They do those limited ticket raffles continuously....I think it is one of their primary funding sources for the museum. So if you need an excuse.....you are supporting a museum by buying a ticket.

Of course having the discipline to only gamble a couple of times is NOT how gambling and the thrill of gambling works. The guy I know that won TWO CORVETTES in the raffles has never driven them.....they went right into storage. He had a pretty good hit to his income taxes as a result of wining those cars. Even though I am not a car guy......his wining got me interested in the museum and their raffles.....as you can see.

Speaking of cars......the discussion about cars yesterday got me thinking about how many miles I have either driven or done over the past 21 years. I have done about 1.3 MILLION miles over the past 21 years.

 

Speaking of miles......I have a show this evening. It is out of town but not too far....about a 60 mile drive for me. So add another 120 miles round trip to the miles above. I have to be there at 5:00 for load in and sound check.....but since it is not too far I will be able to catch the close of the markets today.......I will leave about 3:15 and get back tonight about 12:00.

 

I saw this headline today on an article:

It’s really easy to navigate’ this stock market, says a BofA star strategist. Here’s what she says to do

Here is the opening of the article. I cant read any further since it is paid content.

"Head of U.S. equity and quantitative strategy at Bank of America, Savita Subramanian offers her best strategy for navigating topsy-turvy financial markets as the U.S. economy attempts to claim a sustained recovery from COVID-19."

MY COMMENT

That is some corporate title......."HEAD OF U.S. EQUITY AND QUANTITATIVE STRATEGY". I dont have a FANCY title like that....but I will tell you my view of navigating the current market.....and.....in fact, any market as an investor. Simply buy TOP QUALITY AMERICAN companies and hold the stocks for the long term. Or......better yet for most people.....simply buy the SP500 and hold for life with no trading, no market timing, no fancy stock market systems........AND....be sure to reinvest ALL dividends and capital gains since the reinvestment accounts for about 40%......or more....of all gains over the long term.

I like this little article on this topic even though it is from back in APRIL 2021.

THE POWER OF REINVESTED S&P500 DIVIDENDS

https://www.wealthycorner.com/the-power-of-reinvested-sp500-dividends/

(BOLD is my opinion OR what I consider important content)

"Understand the massive impact of reinvested S&P500 dividends. I'll cover the history of dividend growth, stability and the impact of taxes on dividend reinvestment.

Intro
All DIY Investors Should Understand Dividend History

A study of S&P500 history is useful for boring index investors like me. After all, S&P 500 index funds are extremely popular among investors. Combined, the mammoth index funds VOO and SPY have over $1 trillion invested in the S&P500index.

Some useful traits you can learn from looking back at S&P500 dividend history:

• How dividends affect total S&P500 returns;
• Dividend stability;
• Dividend growth; and
• How taxes affect total returns with dividend reinvestment.

Dividend Contribution to S&P500 Returns

If you crunch the numbers on S&P500 returns over the last 100 years (1921 – 2021), you will find the following:

1. Annual S&P500 return without dividends reinvested: 6.57%
2. Annual S&P500 returns with dividends reinvested: 10.7%

What Are S&P500 Dividends?

The S&P500 index is a collection of 500 large profitable U.S. companies. The S&P500 index dividend represents the total dividends paid out by these 500 companies, but not all 500 companies pay a dividend. Most of the index dividend comes from the largest companies in the index.

Huge companies like Apple make up a larger part of the index than small companies. This type of index is called a Capitalization Weighted Index. You can learn more about the mechanics of indices and index funds in this post.

A dividend – a cash payment to shareholders – a way for a company to share its earnings with company owners (you). Share buybacks are another method that can be used to give back to shareholders.

S&P500: No Dividends Reinvested vs. Dividends Reinvested

I crunched some of Robert Shiller’s S&P500 data to build this chart. It highlights the effect of reinvesting dividends. I like this chart; it tells the story.


Let’s assume you invested $1,000 into the S&P500 in 1971 (50 yrs ago). Today you would have:

1. $39,000 without dividends reinvested (total return); or

2. $131,100 with dividends reinvested.

Over 70% of the total return is attributed to reinvested dividends.

You can thank compound growth for this effect. Dividends are used to buy more index ETF shares. These shares in turn yield more dividends. The cycle repeats and repeats, fuelling a positive feedback loop (exponential growth).

With the current low S&P500 yield of 1.4%, dividends don’t make as big of a contribution as they did in the past. But even a 1% difference in returns will result in a huge difference when compounded over the long term.

The Low Interest Rate Environment

Low interest rates push up valuations due to a lower discount rate. These increasing valuations reduce the dividend yield. To understand more about the relationship between interest rates and valuations, you can read about Discounted Cash Flow Analysis.

In addition, the S&P 500 is heavily weighted with mega-cap growth tech stocks. These monsters favor share buybacks to return money to shareholders rather than dividends.

You’re not ready to buy individual stocks if you don’t understand discounted cash flow analysis and can assess a business. Even if you do, you will likely fail to beat the returns of index funds over the long term.

Price Return vs. Total Return Index

The index value with re-invested dividends is called the “Total Return Index”. Otherwise, it’s called a “price index”. The price index is proportional to the weighted market caps of the underlying companies in the S&P500 index.

You normally see the price index when you research an index. So, when you google “S&P500 Index” the price chart you see does not include reinvested dividends. And the value of an index ETF security follows the price index. It took me a while before I figured this one out.

As of writing this, the S&P500 dividend yield is nearing its all-time low of1.4%. You can find the real-time current trailing 12-month yield here.

S&P500 Dividend Growth and Stability

S&P500 dividends have grown at an average annual rate of 6.0% per year between 1971 and the present (based on Shiller’s Data).

I’ve graphed out the S&P500 dividends relative to S&P500 earnings, adjusted for inflation. Dividends are sturdy.


The plot and the average dividend growth rate of 6.0% tells you two important things:

1. 1. Dividend growth has outpaced inflation in the long term; and
   2. Dividend growth has been extremely stable relative to S&P 500 earnings, and even more stable relative to the S&P500 index price.

If you like stability and have lower risk tolerance you’ll naturally gravitate towards dividend-yielding business or indices. I personally find comfort in a robust growing dividend from an index or an individual stock.

Taxes: A drag on Dividend Compounding

This all sounds great, but there is a kicker: dividends are taxed before they can be reinvested. This imposes a “tax drag” that reduces the compounded effect.

The good news is that you can avoid tax drag completely by using tax-sheltered accounts (RRSP, TFSA, 401K, Roth IRA, HSA, ect). Just watch out for Foreign withholding tax drag if you invest in foreign equities – I talk more about this here for Canadians.

In addition, dividends will be taxed at lower tax rates compared to employment income. To learn more about taxes, check out this guide on investment taxes for Canadians.

Check out this plot to visually see the result of a 15% tax drag on total S&P500 returns.


What about the DRIP?
Are dividends still taxed if I use the Dividend Reinvestment Program (DRIP)?

Yes they are.

As a refresher, dividends are automatically reinvested under the DRIP to buy more shares of the stock or ETF, without paying commission fees. This doesn’t work for any stock/ETF, you first have to make sure the security is DRIP eligible.

How to Calculate Tax Drag

The overall tax drag represents the loss in total returns from dividend taxes. The drag depends on two factors:

1. The dividend tax rate; and
2. The dividend yield.

Consider an investor named Kara. Kara pays a 15% tax on dividends. She holds Vanguard’s VOO S&P500 ETF that provides a 1.4% dividend yield.

Kara will have an overall dividend tax drag of: (15%)(1.4%) = 0.21%. So, her total returns will be 0.21% lower than the Total S&P500 index returns.

But, there are also fund fees that add additional drag. The total tax drag including fund fees can be found by adding the MER to the dividend tax drag.

VOO has a tiny MER of 0.03%. The total tax drag will then be: (15%)(1.4%) + 0.03% = 0.24%. Kara’s returns of holding VOO will be 0.24% lower than the total S&P500 return.

This 0.24% compounded over 30 years at a 10% return results in a portfolio value at the end of year 30 that is 6.34% lower relative to the no-fee case.

This is insignificant, especially relative to mutual fund fees of 1% to 2.5%.

Bottom Line

• The price of the ETF or individual stock that you see on searches normally does not include reinvested dividends. Look up the total return if you want to the return with reinvested dividends.

• Dividends are a large component of total S&P 500 index returns, with 40% of the annualized return attributed to dividends over the past 100 years.

• Dividends are much more stable than earnings or index prices over time.

• S&P500 dividends have grown at 6% annually over the past 50 years, beating inflation.

• Tax drag on the compound effect will reduce total returns, even if you use the DRIP."

MY COMMENT

The reinvesting and compounding of dividends and capital gains creates MASSIVE compounding over the long term. Compounding is the financial engine that creates family wealth.....often multi-generational family wealth.

 

You are so right Zukodany.....September 20 will go down in history as a major investing event.......NOT.

It is ACTUALLY a perfect example of the short term and how important it is for the average investor to simply IGNORE the short term DRAMA. The 20th was a perfect example of a news/media driven market drop. All the articles that suddenly hit about.......Evergrande, the FED, the IMPENDING correction, and the government tax and spend plans......that day were rampant fear mongering.

The proper response to that sort of stuff and that sort of day......just laugh at it and ignore it. Or if you prefer a football analogy......."just run it off".

 

Speaking of football and dealing with PAIN. I had a friend that played college football back in the old days of TOUGH coaches. He injured his shoulder one day at practice. So, he went to the coach and wanted to go to the training room to get evaluated. The coach told him come over here.....went to the training box.....took out an aspirin and some tape......taped the aspirin to his arm....and told him "GET BACK OUT THERE". Those old football coaches had a really nasty sense of humor.

 

WELL....it is really pretty easy to call anything to do with investing. Mainly it is a case of.......whatever is happening at the moment......DONT DO ANYTHING. Just sit and wait. Sooner or later things return to the POSITIVE and move forward again.

Of course the above ASSUMES that how you are invested is RATIONAL and REASONABLE.

 

HERE is the economic news of the day that no one will care about.

US jobless claims rise 351,000 in surprise jump
Continuing claims jumped to 2.845M

https://www.foxbusiness.com/economy/initial-jobless-claims-september-18

(BOLD is my opinion OR what I consider important content)

"The number of Americans filing for first-time jobless benefits unexpectedly rose last week.


The Labor Department said Thursday that 351,000 Americans filed for first-time unemployment benefits in the week ended Sept. 18, an increase from the previous week’s upwardly revised 335,000 filings. Analysts surveyed by Refinitiv were expecting 320,00 new filings.

"Despite the rise, claims are still near a pandemic-era low," said Chris Giamo, head of commercial banking at TD Bank.

Continuing claims for the week ended Sept. 11 jumped to 2.845 million, worse than the 2.65 million that analysts were expecting. The prior week’s reading was revised higher by 49,000 to 2.714 million filings.

The increase in continuing claims came a week after the expiration of $300 per week in supplemental unemployment benefits.

About 11.25 million Americans received some form of unemployment assistance, a drop of more than 856,000 from the prior week. More than 26.6 million Americans filed for benefits during the comparable week in 2020.

"For those ready to return to work following a period of displacement or unemployment, there are a record number of open jobs awaiting," Giamo said.

There were 10.9 million jobs open in July, according to the Job Openings and Labor Turnover Survey released earlier this month."

MY COMMENT

The labor and employment markets are SO screwed up at the moment. The pandemic and programs put in place to deal with it have TOTALLY distorted the normal labor and employment markets. What a mess. BUT....it will slowly resolve over the next 12-24 months. A valuable LESSEN to people as to what happens when you allow.....labor and employment.....to be disrupted by government trying to solve some issue.

 

Way to go oldmanram. I suspect your "hunch" or "feeling" was a result of your long investing and financial experience.

I do STRONGLY believe that over many years of investing.....especially if you are successful.....a person does develop a good sense of "PROBABILITY".......or as we like to call it....a "feeling". I try to base ALL of my investing on "probability". I try to use what the academic research has shown to be FACT and PROBABILITY when it comes to investing.

BUT....on the flip side.....I ALSO STRONGLY believe that the MAJORITY of people that invest will.......NEVER......realize how to successfully invest and will very much LAG the general averages like the SP500. I believe this because the investing research shows this to be FACT. AND....we know that this is ALL based on human behavior and the human brain.

Actually......typing this makes me realize how SPECIAL all the posters on the site are. This site.....STOCKAHOLICS....is the BEST investing site I have posted on over my 25+ years of investment posting. The people that POST and LURK the are a special.........sub-group......of investors and traders.

 

Markets are STILL cooking right along. Looks like we avoided the typical mid morning DIP. Now we are entering the dreaded.......East Coast lunch hour....when all the bankers, traders, and investors in New York.....used.....to fan out into the restaurants and bars from their offices and try to push their little trades and narratives.

THERE is MONEY to be made today.....LETS GO GET SOME. (by doing nothing)