Short cash, medium dividends, long growth stocks

[conwy]

Given the following:

• Slow growth in developed countries over the next 10 years
• Period of economic/political turbulence over the next 10 years
• Bond market not a good deal
• Slow but steady inflation

I'm considering this strategy:

Short cash - Big bucket of cash to fund semi-retirement and act as a safety buffer over the next 5 years. Inflation seems to be pretty low, at least for my low-cost lifestyle, and I can always move to a lower-cost-of-living area.

Medium dividends - Big quantity of dividend stocks may provide steadier and smoother returns than growth stocks over the next 15 year period, so I can still get some growth/compounding during the slow-growth period. Also (though I suppose this is Australia-specific) dividend income is taxed less, so it's a more tax-efficient strategy outside of superannuation (Australia's name for pension).

Long growth stocks - Since growth will be slower, it will take longer for compounding to take effect. So it's better to put less money into growth but keep it there for a much longer time period - 25-45 years. Since I'll probably be living a long life, it's important to have a chunk of money that I don't touch until well into my 60s-70s. This is perfect for putting into superannuation.

[thedollar]

Seems that your strategy is pretty classic 60/40 (or whatever ratio) just with cash as your safe part of the portfolio instead of bonds.

What will your asset allocation be percentage-wise (dividend / growth / cash)? How old are you and will you be REing right away?

[jacob]

I'd argue that the distinction between growth and dividend stocks is pretty meaningless from a math point of view.

Yeah, but economics is not math

Dividends are unretained earnings that are paid out if and only if the cash flow is there. This tells me a few things: they definitely have positive earnings and some faith that these earnings will continue insofar they're not borrowing the money to pay out the dividends (hi IBM). They are making more money than they know how to spend on growth (otherwise they'd retain all their earnings). If the payout% is high, then there are almost no growth opportunities left, see e.g. phone and tobacco companies. These companies also tend to be older. Note that AAPL pays a dividend now.

If a company doesn't pay dividends, it's presumably because they think they can invest the monies best in themselves ... or by buying up other companies and realize some synergy (which they wouldn't get if they gave a dividend to you and had you invest in those other companies). These companies are in other words mostly growth companies. If a company doesn't pay a dividend and isn't growing, it's in trouble. The only way for the investor to gain then is via market multiple-expansions (essentially getting a free ride). These companies tend to be younger.

So while the math is the same, the underlying companies generally aren't. They would respond differently in different environments as would their stock price.

[chipmunk]

This tells me a few things: they definitely have positive earnings and some faith that these earnings will continue insofar they're not borrowing the money to pay out the dividends (hi IBM).

IBM is borrowing money to pay dividends? Can you elaborate?

According to IBM's latest 10-Q, for the six months ending June 30, 2019, IBM had the following cash-flow numbers ($ millions):

Net cash provided by operating activities: 7700
Payments for property, plant and equipment (that is, CapEx): (1122)
Common stock repurchases: (1236)
Cash dividends paid: (2833)

7700 - 1122 - 1236 - 2833 = 2509

So, even after CapEx, dividends, and share repurchases, IBM still had ~$2.5 billion in cash leftover. Yes, IBM has a lot of debt but I'm not seeing that they're relying on new debt to make their dividend payments. (KMI was doing that ~5 years ago and I got burned when the practice finally became unsustainable. That experience taught me to carefully inspect the statement of cash flows for unsustainable dividends.)

Sidenote: Your parenthetical comment about IBM caused me to break a long stretch of lurking. I have not logged in to this account since December 22, 2014.

[jacob]

@chipmunk - They're famous for being the first (or biggest) to exceed their earnings in terms of dividend+buyback outlays and get their fingers burned. IIRC that was back when it was trading rather north of $150---around 2014 or 15. An example of market mispricing/inefficiency---that while the information was there, the general insight wasn't. What made it interesting was that Berkshire was establishing a big position at the time.