Dividend stocks vs. dividend ETFs

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kkrekeler
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Dividend stocks vs. dividend ETFs

Post by kkrekeler » Wed Jul 11, 2018 1:39 pm

My wife and I just retired (63/64) and we have about $250,000 to invest in dividend stocks. What are people's thoughts about investing in individual dividend stocks vs. dividend ETFs? I am considering buying Vanguard VIG and VYM ETFs but the yields are only about 2% and 3% respectively. I could probably get a better yield if I managed 30 or 40 stocks myself, but there's more volatility with individual stocks compared to ETFs with hundreds. Comparing costs, the expense ratios of the ETFs are low (0.08%) and I'd have to pay $7 per trade if I went with individual stocks, which can add up (40 x $7=$280), especially if I continue to add shares over the years. Thanks for any advice you an provide.

mega317
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Re: Dividend stocks vs. dividend ETFs

Post by mega317 » Wed Jul 11, 2018 2:51 pm

Given those two choices, I would prefer funds for the reasons you listed. The higher yield you could get by picking stocks yourself will come with greater risk.

But really you should ask yourself why you are looking for dividend stocks at all. People have typed until their fingers bled on this topic here and on other forums, but we should at least be clear that dividend-paying stocks are not in any way like bonds.

MotoTrojan
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Re: Dividend stocks vs. dividend ETFs

Post by MotoTrojan » Wed Jul 11, 2018 3:02 pm

Why do you want dividend paying stocks/funds as opposed to a broad-based index fund? As a percentage of your portfolio, how much do you anticipate spending per year (or what do you expect to spend from this $250K)?

Total Return is all that matters. When a fund/stock pays out a dividend, its price will be reduced by the same amount. There is nothing special about a dividend. Periods that showed dividend funds beating the total market are explained by other factors such as Value.

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CyclingDuo
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Re: Dividend stocks vs. dividend ETFs

Post by CyclingDuo » Wed Jul 11, 2018 3:07 pm

kkrekeler wrote:
Wed Jul 11, 2018 1:39 pm
My wife and I just retired (63/64) and we have about $250,000 to invest in dividend stocks. What are people's thoughts about investing in individual dividend stocks vs. dividend ETFs? I am considering buying Vanguard VIG and VYM ETFs but the yields are only about 2% and 3% respectively. I could probably get a better yield if I managed 30 or 40 stocks myself, but there's more volatility with individual stocks compared to ETFs with hundreds. Comparing costs, the expense ratios of the ETFs are low (0.08%) and I'd have to pay $7 per trade if I went with individual stocks, which can add up (40 x $7=$280), especially if I continue to add shares over the years. Thanks for any advice you an provide.
Sounds like you are looking to generate income in retirement from the $250K. How much annual income from the $250K were you hoping to generate?

It's difficult to give a full answer without any of us able to see your bigger picture. Suggested format is here:

viewtopic.php?f=1&t=6212
Last edited by CyclingDuo on Wed Jul 11, 2018 9:19 pm, edited 1 time in total.
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Grt2bOutdoors
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Re: Dividend stocks vs. dividend ETFs

Post by Grt2bOutdoors » Wed Jul 11, 2018 8:02 pm

kkrekeler wrote:
Wed Jul 11, 2018 1:39 pm
My wife and I just retired (63/64) and we have about $250,000 to invest in dividend stocks. What are people's thoughts about investing in individual dividend stocks vs. dividend ETFs? I am considering buying Vanguard VIG and VYM ETFs but the yields are only about 2% and 3% respectively. I could probably get a better yield if I managed 30 or 40 stocks myself, but there's more volatility with individual stocks compared to ETFs with hundreds. Comparing costs, the expense ratios of the ETFs are low (0.08%) and I'd have to pay $7 per trade if I went with individual stocks, which can add up (40 x $7=$280), especially if I continue to add shares over the years. Thanks for any advice you an provide.
More money has been lost reaching for yield than at the point of a gun. While there are some dividend paying equities that are temporarily out of favor thus yielding above average, there are others which are paying an unsustainable level of dividends. Why not just purchase a fund and focus on total return? If you went with individual equities or a fund, are you pursuing this type of investment strategy because you need the income? It sounds like you don't (especially if you continue to add shares over the years), a total return strategy may be a better choice. You can still choose to reinvest the distributions and pick up shares but you won't be hit with transaction fees of $7 per trade.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

rgs92
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Re: Dividend stocks vs. dividend ETFs

Post by rgs92 » Wed Jul 11, 2018 8:37 pm

I think that's too much to put in a limited, interest-rate-sensitive part of the market.
Maybe $50 to 100K at most.

The standard recommendation here is a broad index fund for stocks, either S&P500 or Total Stock Market index.
Dividend funds have lagged over the last decade (and longer) because they did not include what turned out to be the mega-growth stocks like Amazon, Facebook, Apple, Netflix, Alphabet (the FANG stocks), and more.

Whether this will continue, who knows? But the lesson is to not try and outsmart the broad market.
A dividend fund will not provide more income than a broad fund since income is derived from capital gains and dividends.
And dividend funds are no less volatile, either.

It's too much of a gamble to put too many eggs in the dividend basket.

delamer
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Re: Dividend stocks vs. dividend ETFs

Post by delamer » Wed Jul 11, 2018 8:52 pm

Also agree with earlier posters that you should be investing for total return, not for dividends. You should familiarize yourself with the concept of Safe Withdrawal Rates, and use that to determine your withdrawals. (See the Boglehead wiki.)

In addition — if you were run over by a bus tomorrow, would your wife be prepared to manage a portfolio of 30 to 40 stocks?

If not, then that is another good reason to go with an ETF or two.

jbranx
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Re: Dividend stocks vs. dividend ETFs

Post by jbranx » Wed Jul 11, 2018 9:13 pm

I agree with the other posters that you would be far better off to skip the dividend ETFs and div. stocks. VIG ten-year returns are 9.72%; VYM, 10.23%; and VTI, total US market, 10.34%. But turnover, meaning capital gains, is much higher in the div. ETFs, 14.3% for VIG and 9% for VYM. So, you're paying higher taxes on both the dividends and turnover.

VIG, the dividend growth one, sells now at a PE of 23.9; VYM at 18.6, and VTI at 20.8. There is no apparent value of either div. ETF over just the more tax efficient and higher performing Total Market. This year both of the divs. have underperformed Total Market.

If you need cash from your holdings, just sell some Total Market, and also keep the money you will be spending on taxes. The whole concept of dividend ETFs is probably flawed: they are based solely on screening for dividend consistency/growth, but not for buybacks, which today may be close to the dividend amount, and you pay no taxes on those "hidden" shareholder returns.

Arinbjorn
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Re: Dividend stocks vs. dividend ETFs

Post by Arinbjorn » Wed Jul 11, 2018 9:15 pm

At one point, the internet led me down a rabbit hole of dividend searching. At first blush, it doesn't seem unreasonable. VYM seemed like a solid pick to me. After a lot more research, and many of the thoughts illustrated before by others here, I ended up ultimately very satisified with the 3 Fund Portfolio.

Maybe some day I will add a small percentage in a REIT fund, but really, there is a lot of amazing things going for the 3 Fund strategy. The new Boglehead book goes into depth on it - it's an excellent read, and I think a sub $20 expense for education before outlaying $250k is justifiable. Taylor explains in more detail and more concisely than I could.

I don't think you will end up any better off chasing dividends for the sake of dividends. Total Stock Market (VTSAX)/Total International Stock Market also provides some dividends, less dividends but less volatility than a dividend ETF or trying to juggle 30 odd individual stocks.

Trying to juggle that much individual stocks also seems just like an unnecessary headache to me.

To each their own, if you want to go that direction, just carefully research and understand what you are doing. The 3 Fund Portfolio convinced me it was a better method for total return , ease of use, less risk, more diversification, ultimately Superior to popular dividend chasing strategies.

Once I understood that when a dividend gets paid out, that stock value loses the amount of the dividend and it becomes a wash, which may potentially also trigger a taxable event, that was an eye opener. Maybe that seems elementary, but I think some people presume dividends are almost like magic free money somehow.

rgs92
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Re: Dividend stocks vs. dividend ETFs

Post by rgs92 » Wed Jul 11, 2018 10:01 pm

One other small note, you mention $7/trade for stock trading. It's $4.95 at Fidelity (and Schwab.)

kkrekeler
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Re: Dividend stocks vs. dividend ETFs

Post by kkrekeler » Sat Jul 21, 2018 5:47 pm

I just want to thank the people who posted their thoughts regarding my intention to invest a portion of our retirement funds in dividend stocks.

After reading and re-reading your posts and buying The Bogleheads’ Guide to the Three-Fund Portolio (and much reading on the Internet), I am totally on board with the Total Return Philosophy. While I can still see some benefits of Dividend Growth Investing, it just doesn’t make as much sense to me anymore. Money doesn’t care how it’s earned - from capital gains, dividends, interest or wherever. So except for the convenience of dividends being sent to your savings/checking account, I’m not sure I see the advantage. Just determine how much you’ll need to live on for a specific period of time and sell shares. Or if your stocks are tanking in a bear market, withdraw from non-stock investments. If you’re living solely on dividends, you’re actually withdrawing money during a bear market!

So I am 80% Vanguard Total Stock Market fund and 20% Vanguard Total International Fund. I veered from the three-fund philosophy somewhat because, with interest rates rising, I have already purchased deferred annuities and CD ladders to comprise the fixed “safe” portion of our allocation, which is now 75% with 25% stock EFTs (VTI and VXUS). I subscribe to Wade Pfau’s research that says the first 10 or 15 year of retirement are the most risky (my wife and I are 63 and 64) and you should keep your stock allocation fairly low. So after a few years, I will be increasing our stock allocation. I’ll also be replacing maturing annuities with the Vanguard Total Bond Market fund and simplifying our portfolio with just three Vanguard funds.

I’m so glad I didn’t go the route of trying to pick 30 dividend stocks and spending my days looking at balance sheets. That was an insane idea! I’m sure to have lost tons of money. Thanks again for your advice!

mega317
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Re: Dividend stocks vs. dividend ETFs

Post by mega317 » Sat Jul 21, 2018 10:53 pm

It's nice to read someone change their thinking (for better or even for worse) because it doesn't happen often. I think you are making a wise choice.
kkrekeler wrote:
Sat Jul 21, 2018 5:47 pm
I subscribe to Wade Pfau’s research that says the first 10 or 15 year of retirement are the most risky
I haven't read Pfau but it strikes me that for many people the first 10 or 15 years of retirement are just about the only years of retirement. I wonder what the data show about that.

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nedsaid
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Re: Dividend stocks vs. dividend ETFs

Post by nedsaid » Sun Jul 22, 2018 10:47 am

kkrekeler wrote:
Wed Jul 11, 2018 1:39 pm
My wife and I just retired (63/64) and we have about $250,000 to invest in dividend stocks. What are people's thoughts about investing in individual dividend stocks vs. dividend ETFs? I am considering buying Vanguard VIG and VYM ETFs but the yields are only about 2% and 3% respectively. I could probably get a better yield if I managed 30 or 40 stocks myself, but there's more volatility with individual stocks compared to ETFs with hundreds. Comparing costs, the expense ratios of the ETFs are low (0.08%) and I'd have to pay $7 per trade if I went with individual stocks, which can add up (40 x $7=$280), especially if I continue to add shares over the years. Thanks for any advice you an provide.
What you are asking is for advice in isolation from your financial big picture. Better to view your portfolio as a whole.

I like dividends and I own individual stocks, 18 in a Brokerage IRA and 4 in DRIP plans. I came up in a different era, before index funds became well known. In a nutshell, my experience has been that individual stocks can be fun, I have had my successes and I have had my disasters. Over long periods of time, I have about matched the market averages. These stocks are less than 15% of my investments. Having them has complicated the task of running the portfolio. If I had it to do all over again, I would probably have just invested in Index Funds.

A dividend strategy is a pretty good one. Problem is that in the aftermath of the 2008-2009 financial crisis and the era of very, very low interest rates, yield got chased like crazy. Wasn't too long ago that the so-called Low Volatility Stocks and the Higher Dividend Stocks were actually more expensive than the broad market. Some of these were priced like Growth stocks when normally these are in the Value category. Dividend Growth is also a good strategy but this was chased pretty hard too. So the timing isn't the greatest. Valuations for such stocks is better now but are not in the bargain bin.

The thing is, we all want to harvest the income from our portfolio and not touch the principal. Such a portfolio might yield 3% if we stretch for yield a bit but that comes at the cost of lower capital gains. Retirees will need a withdrawal rate of more like 4%. The fact is, that unless we have very large portfolios, most of us will have to harvest both capital gains and income to live on. So a Total Return approach doesn't look so bad in comparison.
A fool and his money are good for business.

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CyclingDuo
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Re: Dividend stocks vs. dividend ETFs

Post by CyclingDuo » Sun Jul 22, 2018 7:03 pm

mega317 wrote:
Sat Jul 21, 2018 10:53 pm
It's nice to read someone change their thinking (for better or even for worse) because it doesn't happen often. I think you are making a wise choice.
kkrekeler wrote:
Sat Jul 21, 2018 5:47 pm
I subscribe to Wade Pfau’s research that says the first 10 or 15 year of retirement are the most risky
I haven't read Pfau but it strikes me that for many people the first 10 or 15 years of retirement are just about the only years of retirement. I wonder what the data show about that.
According to the U.S. Census Bureau...

Average age of retirement in the U.S. is 63.
Average length of retirement in the U.S. is 18 years.

https://www.fool.com/retirement/2018/02 ... our-m.aspx
"Everywhere is within walking distance if you have the time." ~ Steven Wright

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arcticpineapplecorp.
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Re: Dividend stocks vs. dividend ETFs

Post by arcticpineapplecorp. » Sun Jul 22, 2018 7:43 pm

welcome to the forum.

congratulations on seeing the light. In case you're interested in reading a couple other articles about why dividend stocks and/or etfs are not the way to go, read here:

viewtopic.php?t=227902
viewtopic.php?t=231661

I always find it interesting to see people get excited about buying a stock for the dividend never considering for a moment:
1. the dividend can be cut when a company runs into trouble
2. the company can go out of business. There goes your dividend, and your entire investment

Suze Orman was pushing dividend stocks for seniors during the global recession as a way to replace the lost income from low yielding bonds/bond funds. That had to be one of the worst suggestions I've ever heard not only for the 2 reasons stated above, but also because she was encouraging seniors to trade safety (bonds) for risk (stocks). Not very wise.

I agree with CyclingDuo that if you want more detailed answers, you'd have to post in the format CyclingDuo suggested.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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JoMoney
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Re: Dividend stocks vs. dividend ETFs

Post by JoMoney » Sun Jul 22, 2018 8:03 pm

If you were building a portfolio of individual stocks, I don't think it's unreasonable to consider dividend consistency and dividend growth as a elementary factor that may signal something about the quality of the company.
If buying/selling stocks in small amounts was prohibitively expensive as it was 25+ years ago, I can see the desire for stocks to distribute regular income for a retiree.
I don't see either of those as being important to a mutual fund investor who is tracking an index or has a professional manager doing more in depth analysis and research, and can generate whatever income distribution they desire at no additional cost by withdrawing from the fund (assuming no load mutual fund).
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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