Dividend stocks vs. dividend ETFs

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kkrekeler
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Joined: Wed Jul 11, 2018 12:59 pm

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.
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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.)

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