Dividend-paying stocks in VTI and VXUS?

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InvestorNewb
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Dividend-paying stocks in VTI and VXUS?

Post by InvestorNewb » Mon Feb 18, 2013 3:58 pm

Hello,

I recently read Kevin O'Leary's new book, and paid special attention to the chapter on investing. The investment chapter can be summarised as follows: Invest in dividend-paying stocks.

Out of the 3267 stocks in VTI, are there stats available on what percentage are dividend-paying?
Are there similar stats for the 6199 stocks in VXUS?

Thx.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)

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Re: Dividend-paying stocks in VTI and VXUS?

Post by nisiprius » Mon Feb 18, 2013 4:43 pm

The gospel of dividend-paying stocks is Just Another Stock-picking Theory. Despite the confidence of those preaching it, it is by no means cut-and-dried or universally accepted. I don't accept it myself, but I think it's mostly harmless. I'll get back to that, but first let me try to address your question.

If you have decided that you want to concentrate on dividend-paying stocks, then, bluntly, you do not want VTI (or VXUS). They are total market index funds. If you like, "total market investing" is Just Another Stock-Picking theory, too--or, perhaps, a Not-Picking-Stocks theory. If you believe in not picking stocks, go with VTI. If you believe in focussing on dividend-paying stocks, then why ask questions about VTI? Why not start looking into the (many) mutual funds that focus on high-dividend-paying stocks.

[Added by Nisiprius: But read stlutz's comment, below].

One example of such a fund would be Vanguard High Dividend Yield Index Fund (VHDYX) and its corresponding ETF, VYM.

I don't know where to go to get counts, but it's whatever the percentage is in the stock market as a whole, and perhaps Kevin O'Leary, whomever he is--not a familiar name to me, who is he?--mentions it in his book.

Here's something that's easy to do. If you're not familiar with navigating the Vanguard website, you should take ten minutes now and actually follow along. I'm just going to do a super rough calculation because it's all I know how to do. vanguard.com, Go to the personal investor's site, type VTI into the search box, wait for the dropdown, click on the right choice, then click the Distributions tab. You'll see that the "SEC yield," which is the income per share as a percentage of price for the most recent month is 2.01%.

Now I type the word "dividend" into the search box and look for Vanguard funds and ETFs that concentrate on dividend-paying stocks, and I settle on Vanguard High Dividend Yield ETF, VYM, which "Seeks to track the performance of the FTSE® High Dividend Yield Index, which measures the investment return of common stocks of companies characterized by high dividend yields." I go to the Distributions tab and see that the SEC yield was 3.15%.

So, I don't know what the count of dividend-paying stocks in VTI is, but VTI paid out about 2/3 as much in dividends as VYM. So maybe "about 2/3" expresses what you want to know.

So, if you've decided to concentrate on dividend stocks, the obvious suggestion would be that if you want a Vanguard index ETF, VYM would be an ETF you could use to follow that strategy.

But, here's the funny thing. VYM started in 2006. What do you think would have happened if you'd invested $10,000 in VYM when it was started, and also invested $10,000 in the Vanguard Total Stock Market--I'm going to use VTSMX in order to force Morningstar to show a growth chart, but VTI would be the same thing--and reinvested dividends? Try to answer the question before you look at the chart. What do you expect from these two funds, knowing that one of them only pays out 2/3 the dividends that the other pays out (but remembering that you are reinvesting those dividends, like letting interest accrue at a bank).

Spoiler space:
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Image

Did you expect it to be that close? Not only did you end up with almost the same amount of money--I'm going to call it a tie, but if you want to be nit-picking the total market fund actually won by $99.06--but, more significantly, the two curves track each other very closely. Maybe you've read that dividend stocks are less volatile, or give you protection in a bear market, or something. Well, you can't prove it by this chart. Again, the real point is that the dividend stocks dropped about the same amount as the total market, but again, if you want to be picky... they dropped just a skosh more.

Dividend stock fund? Total market fund? It hardly mattered.

Think of two bank accounts that earn 5% interest per year (I wish). But suppose these are slightly unusual banks. Instead of having all of the interest accrue in the account, bank A automatically cuts and mails a check for 3% of the balance every Christmas, while bank B automatically cuts and mails a check for 2% of the balance every Christmas. I'm sure you can see that bank A pays out more, AND the account grows more slowly. I'm sure you can see that bank B pays out less, BUT the account grows faster. And I'm sure you can see that if you "reinvest the dividends"--take the check to the bank and deposit it when you get it--they both grow at the same 5% rate.

In the case of stocks, the theory is similar. The only difference is that some people believe that paying out dividends imposes some kind of discipline on corporate management, and that companies that pay out high dividends are likely to be better managed, and that companies that hang on to earnings don't use them wisely. I am skeptical. The other obvious point is that, darn it, everyone knows exactly how much each company pays in dividends, so why wouldn't you expect the market to price stocks accordingly?
Last edited by nisiprius on Mon Feb 18, 2013 5:42 pm, edited 2 times in total.
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Re: Dividend-paying stocks in VTI and VXUS?

Post by nisiprius » Mon Feb 18, 2013 5:04 pm

For anyone else who didn't know, it appears that Kevin O'Leary is a "Canadian entrepreneur, venture capitalist, investor, author, and television personality."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Dividend-paying stocks in VTI and VXUS?

Post by tj » Mon Feb 18, 2013 5:07 pm

nisiprius wrote:For anyone else who didn't know, it appears that Kevin O'Leary is a "Canadian entrepreneur, venture capitalist, investor, author, and television personality."
He's probably best known to the general public for his role on Shark Tank.

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Re: Dividend-paying stocks in VTI and VXUS?

Post by ObliviousInvestor » Mon Feb 18, 2013 5:17 pm

nisiprius wrote:For anyone else who didn't know, it appears that Kevin O'Leary is a "Canadian entrepreneur, venture capitalist, investor, author, and television personality."
I didn't know who he was either, so I visited your wikipedia link. Apparently he's the co-founder and chairman of O'Leary Funds.

Here are their mutual funds. Each fund has the word "yield" or "income" in the name.
Mike Piper, author/blogger

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Re: Dividend-paying stocks in VTI and VXUS?

Post by stlutz » Mon Feb 18, 2013 5:32 pm

If you have decided that you want to concentrate on dividend-paying stocks, then, bluntly, you do not want VTI (or VXUS).
Your post was excellent as usual, nisiprius, but I do disagree with this statement. Approximately 80% of the stocks in the S&P 500 pay dividends. Given that VTI is capitalization-weighted, it would be accurate to say that VTI is dominated by dividend paying stocks. For VXUS, the same would be true (although I don't know the exact percentages off the top of my head).

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Re: Dividend-paying stocks in VTI and VXUS?

Post by sdrone » Mon Feb 18, 2013 5:44 pm

nisiprius wrote:The gospel of dividend-paying stocks is Just Another Stock-picking Theory.
Weeeeeeellll, except that I'm guessing your chart is total return, with dividends re-invested. And don't get me wrong - I love charts!

Been a while since I read this, but I believe something like half the returns of the S&P 500 over long periods of time are due to re-investing dividends.

Yes, chasing specific dividend paying stocks is just stock-picking. But the importance of dividend paying stocks is a reality.

I did like a funny reference, I think it was Morningstar's review of VIG. They referred to it as the Berkshire Hathaway of dividend paying indexes or something like that.

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Re: Dividend-paying stocks in VTI and VXUS?

Post by dbr » Tue Feb 19, 2013 9:23 am

sdrone wrote: Been a while since I read this, but I believe something like half the returns of the S&P 500 over long periods of time are due to re-investing dividends.
It doesn't follow from this that stocks that don't pay dividends don't have good returns. To the extent that dividend paying stocks do have higher return, it appears that this is a result of the value premium. It is more efficient to tilt to value than to select for dividend paying.

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Re: Dividend-paying stocks in VTI and VXUS?

Post by sdrone » Tue Feb 19, 2013 2:59 pm

dbr wrote: It doesn't follow from this that stocks that don't pay dividends don't have good returns.
Neither I nor the original poster suggested this.

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Re: Dividend-paying stocks in VTI and VXUS?

Post by InvestorNewb » Tue Feb 19, 2013 5:15 pm

Thanks for the info, and especially to nisiprius for his insightful post.

I'm planning on buying VTI and VXUS this week, but was just curious about the number of dividend-paying stocks in each of them -- since O'Leary seemed to be pretty adamant about this in the book.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)

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Re: Dividend-paying stocks in VTI and VXUS?

Post by TJSI » Wed Feb 20, 2013 3:14 pm

Nisiprius ( and thank you for your thoughful discussion) has used a 6+ year chart of VHDYX & VYM to question the efficacy of dividend paying stocks to provide superior returns. The advantage of dividend paying stocks is due to the compounding effect over a large period of time. See for instance, the Credit Suisse Global Investment Returns Yearbook 2013 ( pg 18, fig 1) where the real returns (6.3%) over a 103 year period are 67% attributable to dividends. Indeed in the short haul, changes in valuation (P/E) can dominate the return rate. So we must look to a greater time interval (20-30 years) to see the effect of dividend payouts. Because of the drop of dividend payouts in the 90s, it may well take even longer for the dividend effect to show. And there have been several warnings that future returns will not be as great as the historic market returns due to lower dividend payout rates.

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Re: Dividend-paying stocks in VTI and VXUS?

Post by nisiprius » Wed Feb 20, 2013 6:05 pm

DIvidends are important. I personally believe the theory that the value of a stock is the discounted value of its dividend stream. Dividends historically provided more than half of total return.

But it does not follow that dividend-paying stocks have higher total returns than non-dividend paying stocks. The dividends aren't an extra free lunch of some kind, as some investors seem to think. It's not a choice between stocks that grow at the same rate, only one pays dividends and one doesn't. Dividends bleed resources from the company that could otherwise be invested in faster growth.

In fact there's an actual theorem... the Modigliani-Miller theorem I think... that says that under some big old pack of assumptions, the dividends that are paid out should exactly slow growth by the same amount, so that it shouldn't make any difference at all.

In the days before mutual funds, there was no cost-effective way to sell small amounts of stock, and hence no cost-effective way to get an income stream from a stock that didn't pay dividends. So, the traditional division between "growth stocks" and "income stocks."

The only way to believe it makes a difference is to believe that companies that pay dividends are, systematically, better-managed than companies that don't.
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Re: Dividend-paying stocks in VTI and VXUS?

Post by dbr » Wed Feb 20, 2013 7:09 pm

nisiprius wrote:DIvidends are important. I personally believe the theory that the value of a stock is the discounted value of its dividend stream. Dividends historically provided more than half of total return.

But it does not follow that dividend-paying stocks have higher total returns than non-dividend paying stocks. The dividends aren't an extra free lunch of some kind, as some investors seem to think. It's not a choice between stocks that grow at the same rate, only one pays dividends and one doesn't. Dividends bleed resources from the company that could otherwise be invested in faster growth.

In fact there's an actual theorem... the Modigliani-Miller theorem I think... that says that under some big old pack of assumptions, the dividends that are paid out should exactly slow growth by the same amount, so that it shouldn't make any difference at all.

In the days before mutual funds, there was no cost-effective way to sell small amounts of stock, and hence no cost-effective way to get an income stream from a stock that didn't pay dividends. So, the traditional division between "growth stocks" and "income stocks."

The only way to believe it makes a difference is to believe that companies that pay dividends are, systematically, better-managed than companies that don't.
Thanks This is the statement that I would come back to any time this question is asked. The only supplement to it might be the observations by Larry Swedroe that one is essentially building a poor proxy for value tilting, if there indeed is an advantage.

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Re: Dividend-paying stocks in VTI and VXUS?

Post by TJSI » Wed Feb 20, 2013 7:46 pm

I think the argument about dividend payouts is endless. And maybe that is what makes it interesting. There are those who think that once a company has passed out of its intial growth stage and is succcesful the discipline of paying dividends prevents management from wasting money. The choice is not between paying dividends and good, growth giving investments. Rather it is between dividends, good investments, and waste. And for those who observe the corporate scene the the portfolio of waste is endless including expensive toilets, fleets of corporate jets, private executive elevators, attractive consultants, condos for the attractive consultants, executive retreats, expensive artwork, and anyway you could imagine to waste stockholder money. Of course dividend paying compainies waste money, they just don't have as much to waste. M&M theory is a fine theory, it just does not fully incorporate the human factor.

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