Value index vs. high dividend yield index

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Value index vs. high dividend yield index

Postby Schooly D » Wed May 07, 2008 11:23 pm

Vanguard's High Dividend Yield index fund (VHDYX) and its Value index fund (VIVAX) are very similar. The top ten holdings of the two funds have nine stocks in common, the only difference being that VIVAX has ExxonMobil while VHDYX has Coca-Cola. Here are the stock stats of the two funds:

---------- P/E-----P/B----ROA----ROE----EPS Growth----Yield----Market Cap
VHDYX--12.91----1.97----6.61---20.48----9.51----------2.87-------- 50 bn
VIVAX--12.45----1.86----6.63----19.55----9.31----------2.82---------57 bn


VHDYX has a larger number of holdings (579 as compared to 386 for VIVAX), but since the same nine stocks account for ~30% of both funds, the contribution to fund performance of the extra 200 stocks in VHYDX must be small relative to the contribution of the stocks that both hold in common. Since VHDYX costs twice as much as VIVAX (0.4% ER vs. 0.2%) why would anyone choose to invest in VHDYX rather than in VIVAX?

Best,

David
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Postby Gregory » Wed May 07, 2008 11:38 pm

It's not an "either/or" situation.

The value fund will have stocks that percolate up and out of their "value status" where as the hi div fund will tend to hold onto stocks as long as they continue to pay strong dividends.

If one holds VYM for its dividend income stream, and doesn't plan to liquidate any shares, only skim off the dividends, then it cold be a good holding.

Greg
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Postby DaveS » Wed May 07, 2008 11:44 pm

I will tell you that after seeing the recent poor performance of DVY due to its overloading of financial stocks, I think you should just be true to holding the Value Fund. Yes I know the Vanguard Dividend fund did not go down as much, but it costs more than the Value fund and costs matter. The reason why some people may have gone for the Dividend fund is there was not a good value index fund at Vanguard till it abandoned Barra/S & P for the current MSCI Indexes. I cant recall the specifics but the Barra/S & P price to book was really growthy in 2001. Dave
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VHDYX

Postby pkcrafter » Thu May 08, 2008 11:33 am

The High Dividend Yield fund (VHDYX) and ETF, VYM, are not true index funds. They are probably best described as quant funds as they fall in the camp with most of the ETFs now offered. The fund/ETF track the FTSE High Yield Index, which was exclusively created for Vanguard.

FTSE Group has worked with Vanguard to create a FTSE High Dividend Yield Index, which will serve as the basis for the High Dividend Yield Index Fund from Vanguard. Both traditional Investor shares and ETF shares will be available.

The new custom index consists of stocks that are characterized by higher-than-average dividend yields, and is based on the U.S. component of the FTSE Global Equity Index Series (GEIS). Real estate investment trusts (REITs), whose income generally do not qualify for favorable tax treatment as qualified dividend income (QDI) are removed, as are stocks that have not paid a dividend during the previous 12 months. The remaining stocks are ranked by annual dividend yield and included in the target index until the cumulative market capitalization reaches 50% of the total market cap of this universe of stocks.


Source:

http://www.ftse.com/Indices/FTSE_High_Dividend_Yield_Index/index.jsp


Paul
Last edited by pkcrafter on Thu May 08, 2008 10:48 pm, edited 2 times in total.
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DVY, VYM

Postby Gregory » Thu May 08, 2008 11:42 am

DaveS wrote:I will tell you that after seeing the recent poor performance of DVY due to its overloading of financial stocks, I think you should just be true to holding the Value Fund. Yes I know the Vanguard Dividend fund did not go down as much, but it costs more than the Value fund and costs matter. The reason why some people may have gone for the Dividend fund is there was not a good value index fund at Vanguard till it abandoned Barra/S & P for the current MSCI Indexes. I cant recall the specifics but the Barra/S & P price to book was really growthy in 2001. Dave


Again, for those who plan on liquidating their shares then daily NAV certainly matters. (As an aside, I pity those who've had to liquidate index fund shares of late -- hasn't been pretty.) But for those who hold DVY, SDY, VYM for their increasing dividends, they've done well:

DVY dividends (from Yahoo Finance):
5-Sep-07 $ 0.597 Dividend
23-Mar-07 $ 0.56 Dividend
26-Sep-06 $ 0.566 Dividend
22-Jun-06 $ 0.565 Dividend
24-Mar-06 $ 0.568 Dividend
22-Dec-05 $ 0.464 Dividend
23-Sep-05 $ 0.465 Dividend
20-Jun-05 $ 0.462 Dividend
24-Mar-05 $ 0.46 Dividend
23-Dec-04 $ 0.491 Dividend
24-Sep-04 $ 0.463 Dividend
25-Jun-04 $ 0.488 Dividend
26-Mar-04 $ 0.463 Dividend
12-Dec-03 $ 0.288 Dividend

VYM (which hasn't been around as long):
25-Mar-08 $ 0.371 Dividend
14-Dec-07 $ 0.447 Dividend
24-Sep-07 $ 0.346 Dividend
25-Jun-07 $ 0.296 Dividend
26-Mar-07 $ 0.268 Dividend
22-Dec-06 $ 0.175 Dividend

Greg
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Postby Wagnerjb » Thu May 08, 2008 10:34 pm

Gregory said:

Again, for those who plan on liquidating their shares then daily NAV certainly matters. (As an aside, I pity those who've had to liquidate index fund shares of late -- hasn't been pretty.)


Greg: total return investors (this can be active or index investors) will sell shares of the higher performing asset to achieve their cash flow while rebalancing at the same time.

They have been liquidating shares of the TIPs fund (up 4% YTD) and regular bonds (up 2% YTD). Some will actually be selling bonds and buying stocks to keep their balance. Your fear that they are selling at the wrong time isn't founded. They are selling high (bonds) and buying low (stocks) when they rebalance.

I am afraid it is the dividend investors who sell low. When the companies cut the dividend, the yield guy will bail out - just when the stock is at its lowest.

Best wishes.
Andy
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Postby dumbmoney » Thu May 08, 2008 10:57 pm

Gregory wrote:If one holds VYM for its dividend income stream, and doesn't plan to liquidate any shares, only skim off the dividends, then it cold be a good holding.


Dividends = placebo
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Postby Gregory » Thu May 08, 2008 11:00 pm

Sorry, Andy, you're wrong. The retired fully indexed investor, needing to liquidate shares to eat, must scramble to find the assets in his portfolio that aren't dropping with the market. "Let's see, I have to sell shares this week -- what's not dropping?" And every share you liquidate means that much less next time around. And then you rebalance -- hoping that something rises. If people weren't concerned about running out of things to liquidate there wouldn't be so many posts about safe withdrawal rates, would there? Given that many markets are well-correlated, it's not always easy.

I keep reading about the "safe" withdrawal rate. There are obviously people who are relying upon a fully-indexed portfolio are clearly worried about outliving their money. You don't hear that from dividend investors. (Two of my closest friends, both in their 80's, grew up in an era before mutual funds were so widely used. They've accumulated lots and lots of shares of many different dividend paying companies -- along with individual bonds, both muni and corporate -- and they enjoy increasing income every year. They don't worry about what 'the safe withdrawal rate' is.)

The dividend investor collects dividends in good markets and bad. A well-capitalized dividend investor can live off the dividend without liquidating shares. Since we've carefully chosen corporations with rising dividends (e.g., JNJ, KO, PG, XOM, CVX, etc., in addition to international dividend stocks-- I personally don't allow any one stock to make up more than about 1.5-2% of my portfolio). We don't sit around and wait to be blindsided by a dividend cut -- we watch the cash flow, payout ratios, etc. I've never had to sell a stock because it cut its dividend.

The first reason for future subdued marked returns listed by Mr. Bogle stated in The Little Book of Common Sense Investing was the low dividend yield on "the market." (VG lists TSM's current div. yield at 1.93%.) I prefer to level the playing field by devoting a good portion of my portfolio to stocks with solid dividend histories. As the market has taken its hits over the past couple of weeks, and I see my domestic and international dividends coming into my brokerage acct. several times a week, I'm glad I've made the decisions I have. You'll never see me posting about a safe withdrawal rate.

Lots of folks have TSM as their sole domestic equity holding in their 401(k)'s. $10K invested in TSM 10 years ago grew to only $15,640 today. 10 years is a good chunk of a retirement horizon.

We've been through this before. We're not going to change each other's minds.
Last edited by Gregory on Thu May 08, 2008 11:03 pm, edited 1 time in total.
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Postby Gregory » Thu May 08, 2008 11:01 pm

dumbmoney wrote:
Gregory wrote:If one holds VYM for its dividend income stream, and doesn't plan to liquidate any shares, only skim off the dividends, then it cold be a good holding.


Dividends = placebo


I can cash my dividend check, while the NAV of a fund can (and often does) drop like a rock.
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Postby Gregory » Thu May 08, 2008 11:10 pm

dumbmoney wrote:
Dividends = placebo


You must feel that management will always wisely use cash flow to add value to the company, increasing share value. How do you like this for use of corporate profits? http://tinyurl.com/2rkb3w

And why pay a good dividend when you can purchase a new corporate jet, right?

Care to comment?

Greg
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Postby simplesimon » Thu May 08, 2008 11:25 pm

This is something I've thought about when I first discovered the kinds of dividends bond funds pay.

If you had a sizable portfolio, you could just live off dividends and not even have to sell a share.

Gregory, is this what you're getting at?
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Postby Gregory » Thu May 08, 2008 11:31 pm

simplesimon wrote:This is something I've thought about when I first discovered the kinds of dividends bond funds pay.

If you had a sizable portfolio, you could just live off dividends and not even have to sell a share.

Gregory, is this what you're getting at?


You're absolutely on target. Which is what I plan on doing with my "dividend portfolio." Upon my death most of the stocks will go to a medical charity, the rest to my heirs.

Greg
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Postby grayfox » Fri May 09, 2008 1:20 am

Schooly D wrote:Since VHDYX costs twice as much as VIVAX (0.4% ER vs. 0.2%) why would anyone choose to invest in VHDYX rather than in VIVAX?


One reason I like the higher payout fund is because I want a steady cash flow going into my MMF that I can then withdraw automatically every month into my checking account without having to do anything.

I am not opposed to selling and buying shares and re-balancing, I just don't want to have to do it. [And I'm not about to pay someone 1% to re-balance once a year. :x ] I am trying to set things up so that I can go away for or year or two or five and never have to take any action. Those managed payout funds fit the bill, but I am not willing to commit 100% to an unproven concept. In fact I am not convinced that anyone's withdrawal strategy is the best, so I am going with multiple strategies. One strategy being dividend stock funds like VHDYX.
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Postby Gregory » Fri May 09, 2008 10:20 am

grayfox wrote:
One reason I like the higher payout fund is because I want a steady cash flow going into my MMF that I can then withdraw automatically every month into my checking account without having to do anything.

I am not opposed to selling and buying shares and re-balancing, I just don't want to have to do it... so I am going with multiple strategies. One strategy being dividend stock funds like VHDYX.


Do some posters think Vanguard made a mistake by offering a high-dividend fund? I don't. For people like grayfox they fill a need.

One problem I see with selling and rebalancing (e.g., folks now selling TIPS fund and other bond funds because equity funds are taking a beating) is that next month your bond fund payments will be lower. Fewer shares = lower payments (unless rates drop again and fund share NAV rises a bit). Then what? Wait until equities rise to chip off a piece and buy more bonds? First, you could be waiting a while. Second, the rise in equities NAV might be modest (not enough to exceed monthly living expenses, thus not enough to buy more bonds). It's no wonder we see perennial posts about a "safe withdrawal rate!"
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Postby ken250 » Fri May 09, 2008 10:35 am

Hi Andy,

I think selling on dividend cuts is more of a problem for individual stock investors; however, fund investors might bail too if there were a market-wide dividend cut...for whatever reason.

My real point is that some div cuts are justified, and believe it or not, the cut is good news for the investor.

For instance, if earnings are weak it isn't necessarily a bad thing to have the div cut. This means more earnings are retained for future growth...strengthening the long term prospects for the corporation. Personally, this is exactly what I want. As a long term div investor I'm willing to suck up a div cut if it means somewhere down the road the long term growth, dividend, and dividend growth are more secure.

I would be upset if they didn't cut the dividend in some circumstances.
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Postby ken250 » Fri May 09, 2008 10:52 am

Hi David,

VIVAX has a much broader mandate than the HY Idx.

For an investor looking to tilt toward LV I think VIVAX is the better choice, it has both deep value and dividend components.

For someone targeting HY stocks the HY Idx is better.

I use VEIPX, and may put a little something into MGV...
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Postby UKbloke » Fri May 09, 2008 3:30 pm

Gregory wrote:The dividend investor collects dividends in good markets and bad. A well-capitalized dividend investor can live off the dividend without liquidating shares. Since we've carefully chosen corporations with rising dividends (e.g., JNJ, KO, PG, XOM, CVX, etc., in addition to international dividend stocks-- I personally don't allow any one stock to make up more than about 1.5-2% of my portfolio). We don't sit around and wait to be blindsided by a dividend cut -- we watch the cash flow, payout ratios, etc. I've never had to sell a stock because it cut its dividend.


I agree that living off dividends is a great financial lifestyle. Dividends go up in real terms over time and, most importantly, are more stable than stock market returns. I don't really understand your rant about fully indexed investors though. The global dividend yield is about 2% right now and has been higher historically.

The fully indexed investor will not have to sell shares if he can live of a 2% SWR or whatever the dividend yield of the global stock market is at that moment. Many people can do so. It's the ultimate low risk, real growth portfolio strategy. It's also a portfolio strategy that will work for generations to come. By 2150, the majority of the dividend companies you own won't exist anymore.
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Postby ken250 » Fri May 09, 2008 3:58 pm

More bait for the growth trap.
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