Dividend Investing vs. Index Funds

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kadibex1
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Dividend Investing vs. Index Funds

Post by kadibex1 »

As Bogleheads, we all know the fallacy of dividend investing and chasing yield.
That it's more important to focus on total return. Which is why Index investing makes all the more sense.

Yet I've got a friend whom is adamant about only dividend investing and is asking me for advice, if I know of a stock fund with a dividend yield of 4-5%. I've tried to recommend an index only portfolio, but they refuse. So of course I want to point them in the right direction.

So I am thinking of recommending they invest into the dividend focused index fund below.
So at least they'll avoid the dangers of actively managed funds and of course individual stocks. Enron, Kodak and GE anyone?

Please advise. What are your thoughts on the fund? Do you have any better advice or recommendations?

https://us.spdrs.com/en/etf/spdr-portfo ... d-etf-SPYD
donaldfair71
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Re: Dividend Investing vs. Index Funds

Post by donaldfair71 »

Tread lightly. Usually, people have beliefs set in stone, right or wrong, especially when they have had success (or what made them feel successful.

If you really value the friendship, might want to ask yourself if possibly alienating, or worse, is worth it to you.
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kadibex1
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Re: Dividend Investing vs. Index Funds

Post by kadibex1 »

donaldfair71 wrote: Thu Oct 25, 2018 11:17 am Tread lightly. Usually, people have beliefs set in stone, right or wrong, especially when they have had success (or what made them feel successful.

If you really value the friendship, might want to ask yourself if possibly alienating, or worse, is worth it to you.
They're new to investing and got hung up on implementing a dividend only portfolio, but came to me for advice first. Which is why I am here asking for help.
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nisiprius
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Re: Dividend Investing vs. Index Funds

Post by nisiprius »

You could raise the issue cautiously. Notice that Vanguard also has its own dividend-focussed index fund, VHDYX, ETF version VYM. I don't think you'll get anywhere because most dividend enthusiasts are also stock-pickers. Looks like VHDYX has been priced ballpark $30.00/share and has paid about $0.25/quarter, so that's a dividend yield of maybe 3.3%, which isn't going to impress your friend.

Try telling your friend "there are dividend-focussed index funds and ETFs, but they will have lower dividends--offset by faster growth--than the very highest-dividend stocks," and see what they say.
Last edited by nisiprius on Thu Oct 25, 2018 11:32 am, edited 1 time in total.
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donaldfair71
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Re: Dividend Investing vs. Index Funds

Post by donaldfair71 »

kadibex1 wrote: Thu Oct 25, 2018 11:24 am
donaldfair71 wrote: Thu Oct 25, 2018 11:17 am Tread lightly. Usually, people have beliefs set in stone, right or wrong, especially when they have had success (or what made them feel successful.

If you really value the friendship, might want to ask yourself if possibly alienating, or worse, is worth it to you.
They're new to investing and got hung up on implementing a dividend only portfolio, but came to me for advice first. Which is why I am here asking for help.
Perfect, then you stand a chance!

I think a must is a source that shows total return vs dividend investing, that includes the effect of simply selling, say, 2% of stocks/yr vs taking dividends that are yielding 2%. They are the same thing, and have the same effect on a portfolio (removing 2% of the value). I think establishing that is step 1. Step 2 is then breaking down active vs passive and use costs to show that passive > active.
rgs92
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Re: Dividend Investing vs. Index Funds

Post by rgs92 »

AT&T was (is) yielding 6%, but yesterday there was a 1-day 8% drop. So there is an example of the dangers on dividend investing.

Of course, if you feel it is like an annuity, and the principal is just essentially gone, there may be something rational to this approach, but it takes a strong stomach. (And also it takes a leap of faith that the dividend will persist for the very long term.)
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vineviz
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Re: Dividend Investing vs. Index Funds

Post by vineviz »

kadibex1 wrote: Thu Oct 25, 2018 10:59 am Yet I've got a friend whom is adamant about only dividend investing and is asking me for advice, if I know of a stock fund with a dividend yield of 4-5%. I've tried to recommend an index only portfolio, but they refuse. So of course I want to point them in the right direction.
I think you found the only fund I know of with a dividend yield over 4% but I wouldn't touch it: not only is it very new but it also lacks important screens (e.g. for quality) that better established dividend-focused funds tend to have. Plus, SPDR funds have a history of not being terribly tax-efficient so if this is for a taxable account that'd be a ding on SPYD.

If I had to choose one dividend-oriented US fund, I'd probably go with iShares Core High Dividend ETF (HDV). The yield is about 3.5%, which about double the S&P 500 yield. While focusing on stocks that have high yields, it screens for profit sustainability and financial health so I'd feel better about the companies having a good chance of increasing their dividend over time.

https://www.ishares.com/us/products/239 ... lsrc=aw.ds

VYM (Vanguard High Dividend Yield ETF) is also a great choice, but with a slightly lower yield that might not excite your friend.
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magicrat
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Re: Dividend Investing vs. Index Funds

Post by magicrat »

Sounds like your friend came to you for advice, which you game them, and they ignored. You're under no obligation to give them bad advice just because it's what they want to hear.
not4me
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Re: Dividend Investing vs. Index Funds

Post by not4me »

I'll add my voice to the chorus. I'll point out that all ETFs have an associated index, but that doesn't really equate to index investing.

I'd start by telling them there really aren't any stock funds returning over 5% today because there isn't a market for funds that have that much risk. (That may not be as tactfully put as you'd need). Then say there are those that focus on "high" dividends, dividends expected to grow over time, etc. There are "equity income" funds that reach past stocks some. All of which will have pressure to lose fund share price if/when interest rates rise. Many dividend "focused" funds today are heavily concentrated in utilities, reits, etc. & I'd at least try to make sure they realize that. Then ask what their goal is based on that information & tell them you'll help

Your friend is more likely to remember their early investment days as when you didn't help them find what they wanted, but instead got them into something that lost money!

Good luck...
snailderby
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Re: Dividend Investing vs. Index Funds

Post by snailderby »

Does your friend want to pick individual stocks with high dividends or just a mutual fund or ETF that focuses on high-dividend stocks?
MJW
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Re: Dividend Investing vs. Index Funds

Post by MJW »

kadibex1 wrote: Thu Oct 25, 2018 11:24 am They're new to investing and got hung up on implementing a dividend only portfolio, but came to me for advice first. Which is why I am here asking for help.
So your friend:
1. Is new to investing
2. Is already convinced of a specific strategy
3. Views you as a credible source of information on the subject yet dismissed your advice
4. Still wants your advice

Why not just tell them that you've already given what you believe to be good advice? They can find and compare dividend-focused funds from Vanguard and other sources on their own, without you feeling compelled to suggest some sort of middle ground.
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Phineas J. Whoopee
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Re: Dividend Investing vs. Index Funds

Post by Phineas J. Whoopee »

As we repeatedly see on this forum, dividend advocates can be difficult to respond to. Often, when one point is refuted our dividend-favoring members make a different refutable point which leads to the same conclusion.

Motivated reasoning.

Concurring with other posters, I'd decline to offer advice but perhaps suggest some positive search engine terms, like for example low cost dividend mutual fund. Lesser diversification at low cost should still help, despite the concentration into certain types of stocks.

PJW
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nedsaid
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Re: Dividend Investing vs. Index Funds

Post by nedsaid »

kadibex1 wrote: Thu Oct 25, 2018 10:59 am As Bogleheads, we all know the fallacy of dividend investing and chasing yield.
That it's more important to focus on total return. Which is why Index investing makes all the more sense.

Yet I've got a friend whom is adamant about only dividend investing and is asking me for advice, if I know of a stock fund with a dividend yield of 4-5%. I've tried to recommend an index only portfolio, but they refuse. So of course I want to point them in the right direction.

So I am thinking of recommending they invest into the dividend focused index fund below.
So at least they'll avoid the dangers of actively managed funds and of course individual stocks. Enron, Kodak and GE anyone?

Please advise. What are your thoughts on the fund? Do you have any better advice or recommendations?

https://us.spdrs.com/en/etf/spdr-portfo ... d-etf-SPYD
I can understand the desire for income, I am 59 years old and I am thinking about this more and more. Problem is, if you stretch too far in search of income, you find that your "income" is actually return of principal. Had a friend who tinkered with different things, including a managed account. He couldn't help but notice that his preferred stocks that paid high dividends kept falling in price. Pretty much, these were essentially self-liquidating investments. You can reach with yields with bonds only to find some of them default. As I told a family member, 8% of zero is still zero.

The US Total Stock Market Index yields 1.8% to 2%. With a portfolio of blue chip individual stocks, perhaps you can reach to maybe 3%. You reach too far beyond market yields and you will get bit. One could try Master Limited Partnerships but they create a nightmare at tax time with the K-1 forms, which often arrive late, necessitating an extension. These can yield 5-6% or more but most of these are energy plays and a few went bust when energy prices went bust. Again, 6% of zero is still zero.

The US Total Bond Market now yields about 3% now. Adding more investment grade Corporate Bonds might stretch it to maybe 3.5%. But again, you don't want to reach too far.

We all have the idea of living off of dividends and interest and preserving the principal, but if you can juice yields to maybe 3.5% on a balanced stock/bond portfolio, it still isn't the stuff of champaign wishes and caviar dreams. You will likely still have to sell shares and harvest capital gains to live off of unless you have a very large portfolio in comparison to your living expenses. Most of us will have to take a total return approach rather than an income approach. Our portfolios just won't be big enough.

Another concept to understand is that a stock price will drop by the exact amount of the dividend on ex-dividend date. Yes, it is possible for a stock to rise in price on ex-dividend day but the price will still be lower than it would have been by the amount of the dividend. Dividends are not free money. Another evidence of this is that cash rich companies have higher P/E ratios than if they were not so cash rich. In other words, the cash on the balance sheet is taken into consideration by the markets. So a pretty good argument that dividends are a return of capital to the shareholders.

So on the stock side, stick with quality companies. On the bond side, stick with investment grade bonds. There is no free lunch out there. You can stretch a bit for additional income but not by too much.
A fool and his money are good for business.
Wakefield1
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Re: Dividend Investing vs. Index Funds

Post by Wakefield1 »

nisiprius wrote: Thu Oct 25, 2018 11:30 am You could raise the issue cautiously. Notice that Vanguard also has its own dividend-focussed index fund, VHDYX, ETF version VYM. I don't think you'll get anywhere because most dividend enthusiasts are also stock-pickers. Looks like VHDYX has been priced ballpark $30.00/share and has paid about $0.25/quarter, so that's a dividend yield of maybe 3.3%, which isn't going to impress your friend.

Try telling your friend "there are dividend-focussed index funds and ETFs, but they will have lower dividends--offset by faster growth--than the very highest-dividend stocks," and see what they say.
Funds that are high dividend but not too high. Warm but not too hot like in the nursery rhyme Goldilocks and the Three Bears. 3.3% is plenty high for avoiding some of the dangers of chasing yield.
Total return figures for such funds as that VHDYX, Equity Income Fund,Dividend Growth Fund? (Is Dividend Growth Fund still closed to new investors?) (Is O.P.s friend prospectively buying in a tax deferred,Roth,or a plain taxable investment account?)
O.P. and his friend might find some of the posts by member snarlyjack and the replies to them interesting.
(you can access a search for members feature from the "Board Index" page bottom,clicking on "Members" and then after maybe a couple more clicks (" search member's posts")
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nedsaid
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Re: Dividend Investing vs. Index Funds

Post by nedsaid »

The particular fund you asked about has a Price/Earnings ratio based upon estimated future earnings of 15.29. The US Total Stock Market Index has a P/E based upon estimated earnings of 18. Not bad. It is heavy in REITs and Utilities, hence the 4.34% yield. I am a bit leery here as I saw at least three energy companies in the top 10. This is reaching for yield and a bit too much in my view. Too heavy concentration in a few sectors. I see REITs, Utilities, and Energy here. This fund holds 79 stocks.

The Vanguard High Dividend Yield Index is a better investment in my opinion. The yield is 2.86% but you have the large familiar Blue Chip stocks. Better quality of stocks and better diversification across industry groups. P/E ratio based upon estimated earnings is 14.75. This fund holds 402 stocks. My guess is that this would be a more stable less volatile investment than the SPYD.
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curmudgeon
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Re: Dividend Investing vs. Index Funds

Post by curmudgeon »

I have a piece of my portfolio in selected higher dividend stocks. With a basket of them rather than a fund, it gives some opportunity for tax loss harvesting (though you have to be willing to stay out for 30 days, or otherwise pair with another stock which won't be as direct a match). Since I'm keeping my AGI down for now, qualified divs are tax-efficient for us.

While the larger part of my equities are standard index, I'm not happy with various aspects of the FAANG stocks (governance, profitability, weight in the index, etc), so I'm choosing to tilt by adding to my holdings this way.

You definitely need to keep in mind that a dividend stock may be slowly "hollowing out" by paying a dividend (and even increasing it), instead of keeping up with the internal investment needs of the company. On the other hand, many growth companies throw their cash flow around into "growth opportunities" that expand beyond their core competence and never pay off (I've seen this happen way too often in the tech industry).
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Re: Dividend Investing vs. Index Funds

Post by jakehefty17 »

While not the pure Boglehead way, I would be happy they are asking about ETFs. The fact they are asking you first means they respect your opinion, don't push them too hard. Here's a few good dividend ETF's. You didn't say where they hold their investment. Here's what I would look at.

SCHD Schwab US Dividend Equity - ER: 0.07 - ADY: 2.60% - Holdings: 111 - Turnover: 15% - Real Estate: 0%
VYM Vanguard High Dividend Yield - ER: 0.08 - ADY: 2.93% - Holdings: 378 - Turnover: 9% - Real Estate: 0.4%
HDV iShares Core High Dividend - ER: 0.08 - ADY: 3.49% - Holdings: 76 - Turnover: 46% - Real Estate: 0%
DVY iShares Select Dividend - ER: 0.39 - ADY: 3.25% - Holdings: 101 - Turnover: 28% - Real Estate: 0%
SDY SPDR S&P Dividend - ER: 0.35 - ADY: 2.40% - Holdings: 113 - Turnover: 32% - Real Estate: ~7%
SPYD SPDR Portfolio S&P 500 High Dividend - ER: 0.07 - ADY: 4.16% - Holdings: 80 - Turnover: 40% - Real Estate: 24%

Is this friend the type to buy-and-hold? Let's hope/assume so and make suggestions based on that.

Is this a taxable account? Take portfolio turnover into regard. Also, real estate is highly tax-inefficient. So SCHD, VYM, and DVY look good.

Based on the portfolios held, VYM and SDY are the most diversified across sectors. VYM has over 3 times as many holdings than any of the other ETFs, which is impressive diversification considering the yield.

If I had to recommend one ETF, I'd pick VYM. Not because of bias either. The diversification is best, lowest turnover, low ER. I didn't look into PE ratio, Payout Ratio, or EPS. However, I would before actually buying. Ideally PE < 20, PR < 70%, EPS positive for 5+ years.

This is all to the best of my knowledge, I'm interested in dividend investing but am sticking to indexing for now. Hopefully I can learn some things from your post as well! Cheers :beer
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arcticpineapplecorp.
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Re: Dividend Investing vs. Index Funds

Post by arcticpineapplecorp. »

kadibex1 wrote: Thu Oct 25, 2018 10:59 am As Bogleheads, we all know the fallacy of dividend investing and chasing yield.
That it's more important to focus on total return. Which is why Index investing makes all the more sense.

Yet I've got a friend whom is adamant about only dividend investing and is asking me for advice, if I know of a stock fund with a dividend yield of 4-5%. I've tried to recommend an index only portfolio, but they refuse. So of course I want to point them in the right direction.
Let me see if I have this right:

1. He's adamant about dividend investing
2. You recommend an index only portfolio
3. He refuses your advice and insists you give him something else.

I'd say that's the end of the conversation, wouldn't you?

Ask yourself why you're continuing on with this fellow when you've given him advice that he won't take.

Here's another example. If he says "I want to lose weight" and is adamant about taking dieting pills and you recommend he exercise more and eat less and he refuses your advice and insists you give him the name of the best dieting pill on earth...are you gonna give that to him just because he wants it?

In other words, people want all sorts of things that aren't good for them and they want others to give them. If you don't believe in doing that, why would you do that? Seems you're in conflict with yourself. Are you trying to be a financial advisor when you shouldn't? Even advisors have to fire some of their clients from time to time (when they are beligerent to the staff, when they forget to stick with the program the advisor put in place with their agreement originally, etc). Some times you have to know when it's time to cut and run. I'd say this is one of those times.

Personally, I'd say something like, "If you're so sold on dividend investing, then best of luck. Since you've made up your mind, why are you asking me for advice? You've already decided. So just go find your dividend fund that pays you 4-5%. If you're so sure you can get that then why are you asking me? Just go do what you've already decided to do on your own."

It's kinda weird that he's made up his mind about wanting a 4-5% dividend fund but then asks you for one. How did he know such a fund exists? Wouldn't he already have that knowledge, in which case why is he asking you for a recommendation when he obviously already has one in mind. Is he playing games or getting you to confirm the fund he's already found? What's going on here? Pretty circular if you ask me.
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
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kadibex1
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Re: Dividend Investing vs. Index Funds

Post by kadibex1 »

arcticpineapplecorp. wrote: Thu Oct 25, 2018 8:59 pm
kadibex1 wrote: Thu Oct 25, 2018 10:59 am As Bogleheads, we all know the fallacy of dividend investing and chasing yield.
That it's more important to focus on total return. Which is why Index investing makes all the more sense.

Yet I've got a friend whom is adamant about only dividend investing and is asking me for advice, if I know of a stock fund with a dividend yield of 4-5%. I've tried to recommend an index only portfolio, but they refuse. So of course I want to point them in the right direction.
Let me see if I have this right:

1. He's adamant about dividend investing
2. You recommend an index only portfolio
3. He refuses your advice and insists you give him something else.

I'd say that's the end of the conversation, wouldn't you?

Ask yourself why you're continuing on with this fellow when you've given him advice that he won't take.

Here's another example. If he says "I want to lose weight" and is adamant about taking dieting pills and you recommend he exercise more and eat less and he refuses your advice and insists you give him the name of the best dieting pill on earth...are you gonna give that to him just because he wants it?

In other words, people want all sorts of things that aren't good for them and they want others to give them. If you don't believe in doing that, why would you do that? Seems you're in conflict with yourself. Are you trying to be a financial advisor when you shouldn't? Even advisors have to fire some of their clients from time to time (when they are beligerent to the staff, when they forget to stick with the program the advisor put in place with their agreement originally, etc). Some times you have to know when it's time to cut and run. I'd say this is one of those times.

Personally, I'd say something like, "If you're so sold on dividend investing, then best of luck. Since you've made up your mind, why are you asking me for advice? You've already decided. So just go find your dividend fund that pays you 4-5%. If you're so sure you can get that then why are you asking me? Just go do what you've already decided to do on your own."

It's kinda weird that he's made up his mind about wanting a 4-5% dividend fund but then asks you for one. How did he know such a fund exists? Wouldn't he already have that knowledge, in which case why is he asking you for a recommendation when he obviously already has one in mind. Is he playing games or getting you to confirm the fund he's already found? What's going on here? Pretty circular if you ask me.
Great post, thanks for the advice. I have already washed my hands of it and wished him all the best. As for the 4-5% yield, he heard about this from Kevin O'Leary, go figure.
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Re: Dividend Investing vs. Index Funds

Post by Northern Flicker »

Some people have the incorrect belief that dividend stocks are like bonds that throw off an income stream while maintaining a principal value intact. If the issuer of a $1000 face value bond makes a $10 coupon payment, the bond is still has a contractual requirement to deliver $1000 back to the investor at maturity. When a stock distributes cash as a dividend, the value of the company is reduced by the amount of cash distributed, and this will be reflected in the stock price after the distribution.
Risk is not a guarantor of return.
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