Higher Return vs Higher Dividend

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jrfuerst
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Joined: Wed Mar 06, 2019 2:11 pm

Higher Return vs Higher Dividend

Post by jrfuerst » Tue May 07, 2019 5:45 pm

Hello,

I am debating between two different funds in my 401k. Here is info on the funds:

Fund Category 1 3 5 10 All Expense Ratio Dividend Frequency
Large Cap Growth 17% 18% 14% 16% 10% 0.05 $0.39 annual
S&P 500 13% 14% 11% 15% 7% 0.02 $1.51 quarterly


So my question is mathematically, is it better to invest in the fund with the higher returns, or better to invest in the fund with a higher dividend?

Thank you in advance!

dbr
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Re: Higher Return vs Higher Dividend

Post by dbr » Tue May 07, 2019 5:54 pm

The only meaningful measure is the return. Note by definition return in a period is the sum of dividends paid and change in market value of the investment so return includes the dividend. Looking only at the dividend is partial information and not useful for measuring investment results.

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Artsdoctor
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Re: Higher Return vs Higher Dividend

Post by Artsdoctor » Tue May 07, 2019 6:34 pm

jrfuerst wrote:
Tue May 07, 2019 5:45 pm
Hello,

I am debating between two different funds in my 401k. Here is info on the funds:

Fund Category 1 3 5 10 All Expense Ratio Dividend Frequency
Large Cap Growth 17% 18% 14% 16% 10% 0.05 $0.39 annual
S&P 500 13% 14% 11% 15% 7% 0.02 $1.51 quarterly


So my question is mathematically, is it better to invest in the fund with the higher returns, or better to invest in the fund with a higher dividend?

Thank you in advance!
Welcome to the forum.

The first thing that comes to my mind is that you're actually seeking out a Large Cap Growth fund, which is pretty unusual here. If you want to go with a market cap fund, use Total Stock. If it's not available in your 401k, use the S&P 500. But actively choosing a growth fund is probably being driven by past returns, which is never where you want to be. In other words, ask yourself why you're choosing a growth fund in the first place.

The second thing is that, in the end, it's the total return that matters. Since you're investing in a tax-advantaged account, you don't have to take tax ramifications into consideration (if you were investing in a taxable account, you'd be focusing on the after-tax return, not the pre-tax return).

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galeno
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Re: Higher Return vs Higher Dividend

Post by galeno » Tue May 07, 2019 6:46 pm

A successful corporation has a NET PROFIT. Also called NET EARNINGS. The dividend is just a PART of those net earnings given back to the shareholder as CASH.

Personally I prefer share buybacks vs dividends.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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grabiner
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Re: Higher Return vs Higher Dividend

Post by grabiner » Tue May 07, 2019 8:48 pm

jrfuerst wrote:
Tue May 07, 2019 5:45 pm
So my question is mathematically, is it better to invest in the fund with the higher returns, or better to invest in the fund with a higher dividend?
It is better to invest in the fund which will have higher future returns. It doesn't matter whether that is from dividends or share price growth, since it's all your money; you will have some number of dollars in your 401(k) when you retire.

However, this has very little relationship to which fund had higher returns in the past. Growth stocks outperformed value stocks in recent years, but it could just as easily be the other way in the future. US stocks outperformed foreign stocks in the past, but again that could be the other way. It's usually best to diversify as broadly as possible, so that you don't risk having the lowest-returning part of the market.

One factor which is important in determining future returns is the expense ratio; fortunately, you have two extremely low expense ratios. Therefore, I would recommend the S&P 500 for better diversification, unless you hold a value fund elsewhere (such as in your IRA) and want a growth fund to offset it.
Wiki David Grabiner

dbr
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Joined: Sun Mar 04, 2007 9:50 am

Re: Higher Return vs Higher Dividend

Post by dbr » Wed May 08, 2019 9:01 am

grabiner wrote:
Tue May 07, 2019 8:48 pm
jrfuerst wrote:
Tue May 07, 2019 5:45 pm
So my question is mathematically, is it better to invest in the fund with the higher returns, or better to invest in the fund with a higher dividend?
It is better to invest in the fund which will have higher future returns. It doesn't matter whether that is from dividends or share price growth, since it's all your money; you will have some number of dollars in your 401(k) when you retire.

However, this has very little relationship to which fund had higher returns in the past. Growth stocks outperformed value stocks in recent years, but it could just as easily be the other way in the future. US stocks outperformed foreign stocks in the past, but again that could be the other way. It's usually best to diversify as broadly as possible, so that you don't risk having the lowest-returning part of the market.

One factor which is important in determining future returns is the expense ratio; fortunately, you have two extremely low expense ratios. Therefore, I would recommend the S&P 500 for better diversification, unless you hold a value fund elsewhere (such as in your IRA) and want a growth fund to offset it.
Yes, I will reinforce that my post absolutely does not suggest that you can pick return based on prior performance. It can be tempting to imagine that the published data for recent returns are a kind of specification sheet for the fund. Nothing could be further from the truth. The best approach is to hold a diversified stock fund at low cost.

Topic Author
jrfuerst
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Joined: Wed Mar 06, 2019 2:11 pm

Re: Higher Return vs Higher Dividend

Post by jrfuerst » Wed May 15, 2019 1:59 pm

Hello everyone - thank you for all the replies. I have been investing for a year now and I am still reading and learning on terms and definitions. So all the replies I have gotten have been very helpful in helping me decide which to do. Thanks again!

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