Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

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preach
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Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by preach » Sat Jun 17, 2017 12:44 pm

I'd like some input on investing funds into stocks and/or bonds specifically targeting a regular dividend return, preferably a monthly return if possible. Currently I have a significant portion of my retirement funds and my regular brokerage account invested in S&P 500 index funds. Not all retirement options have Vanguard available, but my brokerage account is with Vanguard and I'm heavily invested in VFIAX.


I suppose my goal is to simply receive any dividends and just continue to receive them for the rest of my life. It's just that I'm not actually near retirement age, I'm just a middle aged guy, and ideally I would that over time the amount of dividends could continue to increase also. I'd be willing to continue investing in these funds if this is possible. I would like to set a target of around $200-300/month in dividends. I am thinking that by the end of this year I want to have about $25,000 invested in some combination of funds, and by this time next year about $50,000. I will probably need a little more than that to attain my $300/month first goal, but just getting to the $50k mark is also a separate goal.


ONE DISCLAIMER. Currently I'm in a situation where the direct purchase of any stocks, bonds, .gov bonds, ETFs and such would require me to report it for compliance review. So if I buy mutual funds, these aren't subject to review. I can buy those things I listed, it's just a bit more of a hassle to do so.


Can anyone suggest either a Vanguard mutual fund or possibly an ETF that might fit what I'm looking for. Overall my tolerance for risk is maybe middle of the road. In terms of equities I tend to keep my investments domestic, usually larger companies, but I could go for an occasional mid or small cap. I tend to not go for international stuff or industry specific funds; I'd have to see a pretty compelling history of returns before I'd take that leap. I'm strongly considering tossing between $5k-$10k into VWEHX, I just dont want to throw too much money into this one just yet.

edheath
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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by edheath » Sat Jun 17, 2017 1:05 pm

I like Vanguard High Dividend Yield Index Fund Investor Shares (VHDYX) (or ETF: VYM) which has a current dividend yield of 3.10% quarterly. If you are looking for monthly dividends from bonds, I like Vanguard Intermediate-Term Investment-Grade Fund Investor Shares (VFICX) (or Admiral shares if you have 50k) which has a current dividend yield of 2.79%.
If you want a managed balanced fund, I like Vanguard Wellington Fund Investor Shares (VWELX) (or Admiral shares if you have 50k). It pays out quarterly, but between dividends and capital gains it produces about 3-5% return.

retiredjg
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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by retiredjg » Sat Jun 17, 2017 1:06 pm

I'd like to suggest that looking for dividend income is the wrong way to go about this. The better alternative is to spend from the total return of your portfolio (capital gains and dividends) rather than just dividends. A bonus - you may also end up paying less in taxes if you do this.

This paper discusses why.

https://personal.vanguard.com/pdf/icrsp.pdf

Vanguard Fan 1367
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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by Vanguard Fan 1367 » Sat Jun 17, 2017 1:16 pm

I have really been happy with Vanguard's High Dividend Yield Fund. The mutual fund unfortunately only spits out quarterly dividends but with a current yield of about 3 percent I think it is great and is better than a lot of bond funds.

VHDYX--Vanguard's High Dividend Yield Index Fund.

aristotelian
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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by aristotelian » Sat Jun 17, 2017 1:22 pm

To get $300/month in dividends from an S&P500 fund, my back of the napkin math says you are going to need about $180K invested.

Also keep in mind that total return models assume that dividends are reinvested. If you spend your dividends, your nest egg is going to be growing at a slower rate than you might expect. Most S&P funds also pay quarterly or annually rather than monthly.

If you really want consistent dividends, bond funds typically have higher yields and they are more likely to pay out on a monthly basis.

dbr
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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by dbr » Sat Jun 17, 2017 1:26 pm

To expand on the post by retiredjg, are you accumulating wealth or disaccumulating. If you are withdrawing from assets it doesn't make much sense to focus on dividends other than for convenience of managing cash flow. If you are actually saving money, it makes less than no sense to take this approach simply in order to collect dividends. What is the thought process behind your question, and what do you plan to do with this money. In a taxable brokerage account dividends are a bad idea due to tax cost. If your idea is that high dividend paying investments pay higher returns for the risk taken, then you are mistaken at the first order of magnitude. There may be some arguments for this at more negligible levels of advantage.

This does not mean that a tilt to dividend paying stocks or the inclusion of high yield bonds in a portfolio makes no sense, but the context needs to be the risk and return properties of the portfolio. If there is an answer regarding dividend paying stocks it is probably that they are an inefficient proxy for a large cap value factor tilt. A more common tilt would be to small cap value. Discussion regarding the diversifying effects of a concentration in high yield bonds is mixed with experts that can be found on both sides. A common opinion would be that taking higher risk for higher return is best done by adjusting the stock/bond allocation rather than buying high yield bonds. It is hard to show that high dividend stocks offer any advantage in offering more return at same risk or less risk at same return, though the issue can be discussed.

retiredjg
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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by retiredjg » Sat Jun 17, 2017 1:27 pm

Vanguard Fan 1367 wrote:I have really been happy with Vanguard's High Dividend Yield Fund. The mutual fund unfortunately only spits out quarterly dividends but with a current yield of about 3 percent I think it is great and is better than a lot of bond funds.

VHDYX--Vanguard's High Dividend Yield Index Fund.
What you may not realize is that you may be paying extra taxes.

The dividends from this fund are taxed at your ordinary tax rate. If, instead, you were selling stock mutual funds with long term cap gains, the tax on the proceeds would be at the lower LTCG rate of 15% or 0% (if in the 15% tax bracket).

This is one of the things discussed in that paper I linked above.

I'm not suggesting you should have too large of a stock allocation (for you) in order to accomplish this, but some people depend on bond dividends so much that they actually push their portfolio too far toward bonds.

Of course, none of that may apply to you. Just giving an example.


What I said applies to bond funds. I was thinking of the high yield bond funds, not high dividend yield stock funds. Sorry for the confusion. :oops:
Last edited by retiredjg on Sat Jun 17, 2017 2:00 pm, edited 1 time in total.

livesoft
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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by livesoft » Sat Jun 17, 2017 1:33 pm

Do you want $300 a month that you don't pay any taxes on?

Or do you want $600 a month that you pay $300 a month taxes on leaving you with $300 a month to spend?
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abner kravitz
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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by abner kravitz » Sat Jun 17, 2017 1:39 pm

retiredjg wrote:
Vanguard Fan 1367 wrote:I have really been happy with Vanguard's High Dividend Yield Fund. The mutual fund unfortunately only spits out quarterly dividends but with a current yield of about 3 percent I think it is great and is better than a lot of bond funds.

VHDYX--Vanguard's High Dividend Yield Index Fund.
What you may not realize is that you may be paying extra taxes.

The dividends from this fund are taxed at your ordinary tax rate. If, instead, you were selling stock mutual funds with long term cap gains, the tax on the proceeds would be at the lower LTCG rate of 15% or 0% (if in the 15% tax bracket).
I have a high-dividend fund, and the dividends are taxed as qualified dividends (same as LTCG). Is there something different about the Vanguard fund?

Nate79
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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by Nate79 » Sat Jun 17, 2017 1:52 pm

Dividends are not some magic free money. They come out of the total return and are paid to you.

dbr
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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by dbr » Sat Jun 17, 2017 1:54 pm

Nate79 wrote:Dividends are not some magic free money. They come out of the total return and are paid to you.
I was wondering if that might not be behind this, but one hesitates to ask outright. I think, however, you are right to put this in black and white.

retiredjg
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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by retiredjg » Sat Jun 17, 2017 1:56 pm

abner kravitz wrote:I have a high-dividend fund, and the dividends are taxed as qualified dividends (same as LTCG). Is there something different about the Vanguard fund?
Thanks for catching that. I got some funds confused. :oops: I was thinking the fund being discussed is a bond fund. There are no qualified dividends in a bond fund. I'll fix my post. Thanks again.

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by onourway » Sat Jun 17, 2017 1:58 pm

abner kravitz wrote:
I have a high-dividend fund, and the dividends are taxed as qualified dividends (same as LTCG). Is there something different about the Vanguard fund?
Even though qualified dividends are in fact taxed at the same rate as LTCG, dividends are still less tax efficient than gains taken from increase in share price presuming you are holding for the long term.

abner kravitz
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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by abner kravitz » Sun Jun 18, 2017 10:56 am

onourway wrote:
abner kravitz wrote:
I have a high-dividend fund, and the dividends are taxed as qualified dividends (same as LTCG). Is there something different about the Vanguard fund?
Even though qualified dividends are in fact taxed at the same rate as LTCG, dividends are still less tax efficient than gains taken from increase in share price presuming you are holding for the long term.
Why is this? I'm having a hard time figuring that out. Thanks.

dbr
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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by dbr » Sun Jun 18, 2017 11:28 am

abner kravitz wrote:
onourway wrote:
abner kravitz wrote:
I have a high-dividend fund, and the dividends are taxed as qualified dividends (same as LTCG). Is there something different about the Vanguard fund?
Even though qualified dividends are in fact taxed at the same rate as LTCG, dividends are still less tax efficient than gains taken from increase in share price presuming you are holding for the long term.
Why is this? I'm having a hard time figuring that out. Thanks.
When you sell shares the tax is not on the gross receipt but on the gain. Part of the receipt is basis which is not taxed. If you are selling recently acquired shares likely almost all the sale is basis and not taxed. If you are selling shares that you have held a long time that have a lot of appreciation, most of the sale is gain. It can even be that the sale is at a loss and would result in a capital loss deduction. For this reason one should always track the unrealized appreciation in all the tax lots of one's holdings.

Also, when shares are passed on at death the basis is reset to value at time of death and the heir may be able to sell at no capital gain at all. These are significant tax benefits that should not be overlooked: amount of unrealized appreciation, capital loss, step-up at death.

anonsdca
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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by anonsdca » Sun Jun 18, 2017 11:44 am

Nate79 wrote:Dividends are not some magic free money. They come out of the total return and are paid to you.
This true, but by taking the dividend, rather than selling shares your share count is not reduced---so: 1) Your dividend continues at the same amount next quarter or month, and 2) your income increases when the dividend is increased next year.

avalpert
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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by avalpert » Sun Jun 18, 2017 11:50 am

anonsdca wrote:
Nate79 wrote:Dividends are not some magic free money. They come out of the total return and are paid to you.
This true, but by taking the dividend, rather than selling shares your share count is not reduced---so: 1) Your dividend continues at the same amount next quarter or month, and 2) your income increases when the dividend is increased next year.
That assumes the company pays the same dividend per share next quarter and that it increases next year - neither of which are guaranteed in any way at all.

Dividends are not like bond payments - it is really important to internalize that fact.

Dividends are not a special form of returns from investments (other than in tax treatment) that increase your total returns. Total returns are what matter. Having more shares isn't the goal - getting the highest returns (with appropriate level of risk) for your investment is - don't let artificial anchors like 'number of shares' distract from that.

dbr
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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by dbr » Sun Jun 18, 2017 11:52 am

anonsdca wrote:
Nate79 wrote:Dividends are not some magic free money. They come out of the total return and are paid to you.
This true, but by taking the dividend, rather than selling shares your share count is not reduced---so: 1) Your dividend continues at the same amount next quarter or month, and 2) your income increases when the dividend is increased next year.
Those things are only true if the only way you can think of to obtain income is to cash a dividend check. To be a slave to that is not the best financial management though some feel the convenience outweighs the illogic. I am not against convenience. There is also an argument that a good dividend strategy is helpful to financial discipline. I am not against good discipline either. I am in favor of clear understanding of what is going on. Looking only at part of what is going on, meaning dividends and counting shares, cannot ever be a good idea.

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by pkcrafter » Sun Jun 18, 2017 1:18 pm

by taking the dividend, rather than selling shares your share count is not reduced---so: 1) Your dividend continues at the same amount next quarter or month, and 2) your income increases when the dividend is increased next year.
No, your share count is not reduced, but it isn't increased either. Reinvesting buys more shares. The other problem with taking dividends is you don't control when withdrawals are made. Your fund may drop in value by 30% and then you really want to be buying shares, not withdrawing. No magic in taking dividends.

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by danaht » Sun Jun 18, 2017 1:58 pm

Most companies in the S&P 500 increase their dividends over time (with the exception of companies that don't pay any dividend - like Berkshire). So just by holding the S&P 500 index - you will most likely enjoy increasing dividends over the long run. The only down side to this approach - is that the S&P 500 index currently only pays about 2% in dividends. You may have to wait 10 to 20 years for the increases to make it a 4% payout (on your original cost).

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by anonsdca » Sun Jun 18, 2017 2:05 pm

avalpert wrote:
anonsdca wrote:
Nate79 wrote:Dividends are not some magic free money. They come out of the total return and are paid to you.
This true, but by taking the dividend, rather than selling shares your share count is not reduced---so: 1) Your dividend continues at the same amount next quarter or month, and 2) your income increases when the dividend is increased next year.
That assumes the company pays the same dividend per share next quarter and that it increases next year - neither of which are guaranteed in any way at all.

Correct.

Dividends are not like bond payments - it is really important to internalize that fact.

I know, everyone investing should know that

Dividends are not a special form of returns from investments (other than in tax treatment) that increase your total returns. Total returns are what matter. Having more shares isn't the goal - getting the highest returns (with appropriate level of risk) for your investment is - don't let artificial anchors like 'number of shares' distract from that.
Total returns can still be had even when taking the dividend.

chinto
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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by chinto » Sun Jun 18, 2017 2:48 pm

In reviewing what you wrote I tend to think you do not want just dividend payout, or even high dividend payout, but growth in that dividend payout. If that is true you might want to look at ishares dividend growth etf: DGRO.
It has a .08% expense ratio and is available commission free from Fidelity. It yields about 2.3% vs 1.73 for ITOT.

INVESTMENT OBJECTIVE
The iShares Core Dividend Growth ETF seeks to track the investment results of an index composed of U.S. equities with a history of consistently growing dividends.

dbr
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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by dbr » Sun Jun 18, 2017 3:04 pm

anonsdca wrote:
Total returns can still be had even when taking the dividend.
Total returns can't not be had because total return is about a way of accounting for what investments do. If a person chooses to not compute the return that doesn't somehow make the concept not exist. It just means the investor doesn't know what he has.

The mechanics of how one might withdraw from a portfolio are just that, mechanics, and have nothing to do with what kind of portfolio to construct or how that portfolio evolves over time. Confounding these different things causes no end of confusion and conversations at cross purposes.

aristotelian
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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by aristotelian » Sun Jun 18, 2017 3:54 pm

danaht wrote:Most companies in the S&P 500 increase their dividends over time (with the exception of companies that don't pay any dividend - like Berkshire). So just by holding the S&P 500 index - you will most likely enjoy increasing dividends over the long run. The only down side to this approach - is that the S&P 500 index currently only pays about 2% in dividends. You may have to wait 10 to 20 years for the increases to make it a 4% payout (on your original cost).
If the stock price goes up faster than the dividend, it is possible that they increase the dividend amount but the yield % goes down. It is also possible that growth companies like AMZN and GOOG replace dividend payers in the index. If you want stable consistent dividends, the best approach is going to be Total Bond Market Index.

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by naha66 » Sun Jun 18, 2017 9:27 pm

livesoft wrote:Do you want $300 a month that you don't pay any taxes on?

Or do you want $600 a month that you pay $300 a month taxes on leaving you with $300 a month to spend?
Why do smart people make statements like this, not everybody is in the same tax bracket/situation. These blanket statement are bad, you need to quantify your statement.

preach
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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by preach » Mon Jun 19, 2017 10:25 am

Thank you everyone for the feedback, this is really a great info from a lot of different viewpoints. So basically my take away on this is yes I was a bit unrealistic about my dividend returns. I did not exactly account for the fact that no matter if I took the dividend as income or reinvested it, it would still be counted as income. LTCGs have an advantage here considering I'm in the 28% federal tax bracket, though depending on certain deductions sometimes I can get it down to 25%..not usually though.

I've been pretty happy with my Index 500 fund, so maybe I'll stick with that for now.

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by 4nwestsaylng » Mon Jun 19, 2017 2:57 pm

I have read through the threads, still not sure of the way to go here. In my case, I am just retired, marginal tax rate 25%. Are most dividends treated as LTCG or income? If LTCG, then I am essentially taking some of my gains when I get the dividend, and can reinvest them or not. If income, in my bracket, it would be 25% marginal rate vs 15% for LTCG.

Those in favor of dividend growers/payers state that in a downturn, those equities will hold up or recover better, since the dividends are a reflection of company health (to be sure companies can sell assets,borrow to maintain dividends, eg Chevron (CVX)). Also, the dividends are an extraction of value from the equity investment on a regular basis. You can reinvest them or spend them. When you hold onto the long term capital gains in an index such as SP500, sure they get better tax treatment, if you sell shares and realize those gains. They can evaporate with a drop in the market. The lower tax treatment of LTCGs is precisely because those gains are less certain. I guess some LTCG are realized even in an index fund when a company is dropped from the index or when shares are sold due to changing percentage of that company in the index, but still most of the gains must be reflected in share price.

So with a fund such as Vanguard High Dividend Yield Index (VHDYX) or the ETF (VYM),as compared to an SP500 index fund,does one require less active selling of shares to generate income, and does the former give some downside protection?

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by Vanguard Fan 1367 » Mon Jun 19, 2017 3:05 pm

4nwestsaylng wrote:I have read through the threads, still not sure of the way to go here. In my case, I am just retired, marginal tax rate 25%. Are most dividends treated as LTCG or income? If LTCG, then I am essentially taking some of my gains when I get the dividend, and can reinvest them or not. If income, in my bracket, it would be 25% marginal rate vs 15% for LTCG.

Those in favor of dividend growers/payers state that in a downturn, those equities will hold up or recover better, since the dividends are a reflection of company health (to be sure companies can sell assets,borrow to maintain dividends, eg Chevron (CVX)). Also, the dividends are an extraction of value from the equity investment on a regular basis. You can reinvest them or spend them. When you hold onto the long term capital gains in an index such as SP500, sure they get better tax treatment, if you sell shares and realize those gains. They can evaporate with a drop in the market. The lower tax treatment of LTCGs is precisely because those gains are less certain. I guess some LTCG are realized even in an index fund when a company is dropped from the index or when shares are sold due to changing percentage of that company in the index, but still most of the gains must be reflected in share price.

So with a fund such as Vanguard High Dividend Yield Index (VHDYX) or the ETF (VYM),as compared to an SP500 index fund,does one require less active selling of shares to generate income, and does the former give some downside protection?
Certainly with a dividend yield of about 3 percent, Vanguard's high dividend yield fund will require less active selling of active shares to generate income. The dividend yield of the S & P 500 fund with Vanguard is about 2 percent.

I am "hoping" that the high dividend yield fund will give some downside protection. Someone could go to 2008 and show that the fund dropped dramatically. Given the really poor interest paid by bond funds, I feel like I would rather not put too much in them. I think that I am better off with index funds than active management, I hope that my decision to not have too many bonds works out. The wife and I are prepared to wait out a bear market.

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by MichaelRpdx » Mon Jun 19, 2017 3:22 pm

preach wrote:Can anyone suggest either a Vanguard mutual fund or possibly an ETF that might fit what I'm looking for. Overall my tolerance for risk is maybe middle of the road. In terms of equities I tend to keep my investments domestic, usually larger companies, but I could go for an occasional mid or small cap. I tend to not go for international stuff or industry specific funds; I'd have to see a pretty compelling history of returns before I'd take that leap. I'm strongly considering tossing between $5k-$10k into VWEHX, I just dont want to throw too much money into this one just yet.

Vanguard will tell you.

https://investor.vanguard.com/mutual-fu ... tributions goes to a page that shows bond funds with distribution frequency, yield information and other bits of interest. Adjusting the filters (button at the upper right of the table) will allow you to further restrict the view or even look at non-bond funds.

A similar page for ETFs is at https://investor.vanguard.com/etf/list? ... tributions
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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by avalpert » Mon Jun 19, 2017 3:23 pm

4nwestsaylng wrote: So with a fund such as Vanguard High Dividend Yield Index (VHDYX) or the ETF (VYM),as compared to an SP500 index fund,does one require less active selling of shares to generate income, and does the former give some downside protection?
From October 9, 2007 to March 9th 2009 $10,000 invested in VHDYX fell to $4,315 - the same money in VFINX fell to $4,510. So no, you should not expect any 'downside protection' from chasing dividend yield.

It may require less selling to generate funds to spend - but it may require more buying as you reinvest unspent dividends.

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Pajamas
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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by Pajamas » Mon Jun 19, 2017 3:49 pm

One thing to consider is that focusing on dividends instead of total return unnecessarily narrows the field of possible investments. Some of the stocks with the greatest total returns pay no dividends.

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by jjface » Mon Jun 19, 2017 4:04 pm

Whilst the cons are true we are not talking about huge differences here. 2% S&P or total stock vs a 3% high dividend fund. Total stock market funds are better but it doesn't mean alternatives aren't still good. I doubt it makes that much difference in terms of tax efficiency especially since the OP isn't talking about huge sums. You have less diversification but some of the dividend funds are still pretty diversified. VHDYX still has 428 stocks for example. At the end of the day the OP may have preference for a higher level of income that he doesn't have manufacture himself and is prepared to take the slight disadvantages for this.

Now if he expects $300 a month from $50k then yes he is being extremely unrealistic. That is 7.2%. I'd say you need to target double that for $250-300 a month ie $100k.

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by TropikThunder » Mon Jun 19, 2017 4:19 pm

4nwestsaylng wrote: Are most dividends treated as LTCG or income?
Qualified dividends are taxed as LTCG; non-qualified dividends are taxed as normal income. For reference, 93% of Vanguard's Total Stock dividends for 2016 were qualified.
4nwestsaylng wrote: Those in favor of dividend growers/payers state that in a downturn, those equities will hold up or recover better, since the dividends are a reflection of company health
Those people would be wrong. Blue is VTSAX (Vanguard Total Stock Admiral Shares). Red is Vanguard High Dividend Yield ETF (VYM). If someone can point out to me the downside protection and quicker recovery, I would appreciate it. :twisted:
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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by 4nwestsaylng » Mon Jun 19, 2017 5:56 pm

Thanks, some very good points and clarifications made in the above posts. A very helpful discussion. I have looked at Thomas Partners at Schwab, which focuses on growing dividend companies. Thomas has an ER of 0.8%. From the above comments, it appears probably better and cheaper to be in a SP500 or total stock fund and just be more active in selling shares when needed for income, and still getting about 2% dividend. I am with Schwab, any thoughts on the Schwab 1000 index vs a SP500 or total SM index? Schwab says their 1000 index has outperformed the SP500 index funds. Are they all pretty similar in long term performance?

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by retiredjg » Mon Jun 19, 2017 7:55 pm

4nwestsaylng wrote:I am with Schwab, any thoughts on the Schwab 1000 index vs a SP500 or total SM index?
I think either 500 index or 1000 index can be a good choice. Not sure what "total SM index" is.
Schwab says their 1000 index has outperformed the SP500 index funds. Are they all pretty similar in long term performance?
I doubt their market weight 1000 Index has outperformed the S&P 500 by any significant amount for any significant period of time.

However, Schwab tends to have both a market weighted index fund and what they call a "fundamental" index for several portions of the market. They might be talking about a fundamental index - something I don't even consider a "real" index fund - and that would be comparing apples and oranges.

Keep in mind that Schwab has been pretty aggressive about saying they are "better" when the differences are not even enough to consider important. For example, they advertise they are cheaper than Vanguard and that is true in some cases, but it is not very accurate. The difference is so small as to not matter a bit. But since it is not an outright lie, they get to say it. Same might be true with what you are looking at.

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by not4me » Tue Jun 20, 2017 7:43 am

I understood how dividends work before BH came into being & so wasn't influenced by what is often vocalized. One thing that has somewhat puzzled me is why some take an "all or nothing" approach; I presume it is their search for perceived simplicity. But, I've included dividends as a tool in a broader approach, although not my "be all, end all". Much of the disagreement comes from misinformation, but some comes from those who project on everyone else their risk tolerance, tax situation, stage of life, etc.

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by RAchip » Sat Jun 24, 2017 6:47 am

"Whilst the cons are true we are not talking about huge differences here. 2% S&P or total stock vs a 3% high dividend fund."

Actually, that probably does qualify as a huge difference. Vanguard high dividend pays you 50% more dividend income annually than vanguard s&p. So on a $10 million account, your dividend income would be $300k annually versus only $200k in the s&p fund.

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by Nate79 » Sat Jun 24, 2017 2:23 pm

RAchip wrote:"Whilst the cons are true we are not talking about huge differences here. 2% S&P or total stock vs a 3% high dividend fund."

Actually, that probably does qualify as a huge difference. Vanguard high dividend pays you 50% more dividend income annually than vanguard s&p. So on a $10 million account, your dividend income would be $300k annually versus only $200k in the s&p fund.
Even though the dividend payout may be 50% more the total return will be almost the same. It's basically a wash in the end because these funds track very closely for total return.

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by dbr » Sat Jun 24, 2017 2:41 pm

RAchip wrote:"Whilst the cons are true we are not talking about huge differences here. 2% S&P or total stock vs a 3% high dividend fund."

Actually, that probably does qualify as a huge difference. Vanguard high dividend pays you 50% more dividend income annually than vanguard s&p. So on a $10 million account, your dividend income would be $300k annually versus only $200k in the s&p fund.
But the question is why would one care, more specifically why would you or anyone in particular care? See reply by nate above. Of course, there is not necessarily anything wrong with this if that is what one wants.

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by Vanguard Fan 1367 » Sun Jun 25, 2017 6:32 am

RAchip wrote:"Whilst the cons are true we are not talking about huge differences here. 2% S&P or total stock vs a 3% high dividend fund."

Actually, that probably does qualify as a huge difference. Vanguard high dividend pays you 50% more dividend income annually than vanguard s&p. So on a $10 million account, your dividend income would be $300k annually versus only $200k in the s&p fund.
While I don't have 10 million I appreciate the advice of John Bogle and Bogleheads to not try to time the market and leave large chunks of cash sitting around in money market funds which for years have been 1 percent or way less. I have tried market timing and lost a fair amount of money that way. Either the 500 fund or the High Dividend yield fund just left alone is a pretty good way to park your funds.

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by lazydavid » Sun Jun 25, 2017 6:57 am

RAchip wrote:Actually, that probably does qualify as a huge difference. Vanguard high dividend pays you 50% more dividend income annually than vanguard s&p. So on a $10 million account, your dividend income would be $300k annually versus only $200k in the s&p fund.
It's not a difference at all if you look at it holistically. Once the dividends are paid, your portfolio (excluding the dividend payment) has shrunk to $9.8M for the TSM, but $9.7M for the high dividend fund. There's your $100k gap right there. Dividend payments are not magic, they're a distribution of value. You achieve exactly the same result by also selling about 1% of TSM. Then either scenario has you with $300k in cash, and $9.7M invested.

If you reinvest dividends, you have a $10M portfolio before the dividend is issued, and a $10M portfolio after.

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by dbr » Sun Jun 25, 2017 8:03 am

lazydavid wrote:
RAchip wrote:Actually, that probably does qualify as a huge difference. Vanguard high dividend pays you 50% more dividend income annually than vanguard s&p. So on a $10 million account, your dividend income would be $300k annually versus only $200k in the s&p fund.
It's not a difference at all if you look at it holistically. Once the dividends are paid, your portfolio (excluding the dividend payment) has shrunk to $9.8M for the TSM, but $9.7M for the high dividend fund. There's your $100k gap right there. Dividend payments are not magic, they're a distribution of value. You achieve exactly the same result by also selling about 1% of TSM. Then either scenario has you with $300k in cash, and $9.7M invested.

If you reinvest dividends, you have a $10M portfolio before the dividend is issued, and a $10M portfolio after.
The struggle with every posting seeing something good about dividends is to figure out if the poster is operating under the "dividends are free money" illusion or stating a preference for dividends on some grounds that would make sense or might be legitimately arguable.

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by RAchip » Sun Jun 25, 2017 11:09 am

The argument above is based on the premise that you know what would have happened to a stock's price if cash that was paid out in a dividend was instead held in the company. That cannot be known. I do not accept the claim that keeping cash in a company always increases the market cap of a company by the amount of that cash.

In any event, the fact of the matter is that the huge majority of investors demand dividends. Every single company in the DJIA pays dividends and the vast majority of companies in the s&p 500 pay dividends. Do you seriously think all these companies are doing that for no reason (ie the outcome would be the same if they did or didnt pay dividends)? No. Dividends arent a pointless exercise. They vast majority of campanies pay dividends because dividends create value for investors.

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by dbr » Sun Jun 25, 2017 11:28 am

RAchip wrote:The argument above is based on the premise that you know what would have happened to a stock's price if cash that was paid out in a dividend was instead held in the company. That cannot be known. I do not accept the claim that keeping cash in a company always increases the market cap of a company by the amount of that cash.

In any event, the fact of the matter is that the huge majority of investors demand dividends. Every single company in the DJIA pays dividends and the vast majority of companies in the s&p 500 pay dividends. Do you seriously think all these companies are doing that for no reason (ie the outcome would be the same if they did or didnt pay dividends)? No. Dividends arent a pointless exercise. They vast majority of campanies pay dividends because dividends create value for investors.
This is all true in general. But I don't think most discussions that start in this forum are about the economics of capital investment but are actually questions or claims about picking investments. It's usually about "I like the high dividend fund because I get a big payout every quarter," or "Why not invest in a high yield bond fund -- they pay a lot of money every month," or "By investing this way I get an income of 5% every year." So the question is what is improved for that investor over alternatives that do not pay much attention one way or the other to the dividend? Of course the usual alternative is a total market portfolio which indeed pays dividends, a little less than 2% these days for US stocks and a little more than 2% if we are talking yields from a generic bond fund.

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by RAchip » Sun Jun 25, 2017 11:46 am

I was responding to this argument:

"Dividends are not some magic free money. They come out of the total return and are paid to you."

This argument is misguided. Dividends dont "come out of total return". Total return just means the increase in the market price of your stock plus dividends.

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by dbr » Sun Jun 25, 2017 11:53 am

RAchip wrote:I was responding to this argument:

"Dividends are not some magic free money. They come out of the total return and are paid to you."

This argument is misguided. Dividends dont "come out of total return". Total return just means the increase in the market price of your stock plus dividends.
I can see your point there though I would parse that as the statement you object to and the statement you prefer actually say exactly the same thing. I do prefer your phrasing as being objective, simple, and accurate. I guess it depends on exactly what one thinks "They come out of . . ." is intended to mean. I would say there is less here than meets the eye.

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by MichaelRpdx » Sun Jun 25, 2017 1:56 pm

RAchip wrote: They vast majority of campanies pay dividends because dividends create value for investors.
Dividends distribute value for to investors. They don't create it.
Be Appropriate && Follow Your Curiosity

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by VaR » Sun Jun 25, 2017 6:41 pm

Can we stray further from the original topic and discuss companies who return cash to investors through stock buybacks instead of dividend distributions? Maybe we can just link to that related topic if we can find it. I'm sure there's a thread about it sometime in the past 5 years.

OP: Are you investing in a taxable account? If so then I think you're fine in the S&P 500 fund. You might alternatively think about moving into a total stock market account or a mix of total stock market and total international stock market. Also, are you maxing out your tax deferred investment plan at work?

I've been saving for several decades and have seen tilts and indexing strategies rise and fall in favor - high dividends, dividend appreciation, low volatility, fundamental weighting, equal weighting, smart beta, etc. I think one important strategy in maximizing after tax return is to pick a durable middle-of-the-road strategy for taxable investments - one where you won't change your mind and have to sell and pay capital gains in the middle of your accumulation phase.

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by 4nwestsaylng » Wed Jun 28, 2017 12:41 am

[quote="RAchip"]The argument above is based on the premise that you know what would have happened to a stock's price if cash that was paid out in a dividend was instead held in the company. That cannot be known. I do not accept the claim that keeping cash in a company always increases the market cap of a company by the amount of that cash.

This is something I have wondered. If the TSM pays 2% dividend and a high dividend ETF pays say 3%, is there evidence that in a broad correction of, say 20 percent, the prices of the TSM equities fall less because they have paid out less in dividends? Or a high growth tech stock which has spent its money buying up startups,pays no dividends. When a broad correction comes, are we to believe that its stock will fall less than an Exxon paying 3%?

I don't think that all investors by any means regard dividends as "free money", but for an income oriented strategy, you are essentially being paid part of the price of the stock on a regular basis, with corresponding drops in the actual price of the equity. In a correction, all equity prices may drop, but at least you have received dividends, and the non or low dividend paying equity might fall just as much or even more.

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Re: Am I being unrealistic about my expectations of dividend income? Is there a better alternative?

Post by avalpert » Wed Jun 28, 2017 9:22 am

4nwestsaylng wrote:
RAchip wrote:The argument above is based on the premise that you know what would have happened to a stock's price if cash that was paid out in a dividend was instead held in the company. That cannot be known. I do not accept the claim that keeping cash in a company always increases the market cap of a company by the amount of that cash.

This is something I have wondered. If the TSM pays 2% dividend and a high dividend ETF pays say 3%, is there evidence that in a broad correction of, say 20 percent, the prices of the TSM equities fall less because they have paid out less in dividends? Or a high growth tech stock which has spent its money buying up startups,pays no dividends. When a broad correction comes, are we to believe that its stock will fall less than an Exxon paying 3%?
That is all well and good but it is responding to a strawman of the actual argument.

Nobody thinks that a fund with similar factor exposure is going to decrease by less because of its dividend yield. The question is whether an entity will have different total returns because it chooses to issue a dividend or repurchase shares. The answer ought to be, absent of tax consideration, no - because dividends are taxed more than capital gains (or at best equal to) there ought to be a preference for lower dividends in taxable investments.
I don't think that all investors by any means regard dividends as "free money", but for an income oriented strategy, you are essentially being paid part of the price of the stock on a regular basis, with corresponding drops in the actual price of the equity. In a correction, all equity prices may drop, but at least you have received dividends, and the non or low dividend paying equity might fall just as much or even more.
And you can accomplish the same thing, at lower tax cost and with complete control over the withdrawal amount and timing, selling shares. If you want to lower your equity exposure ahead of a drop that is what you do - if you want to keep your equity exposure you reinvest dividends anyway. Again, absent tax considerations you should be indifferent between the two approaches - but because of tax considerations your preference should be to sell shares when you need income or want to reduce exposure rather than receive dividends.

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