Dividend Clarification

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spdoublebass
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Dividend Clarification

Post by spdoublebass » Fri Dec 15, 2017 2:10 pm

I've been paying attention to the many threads on this forum about dividends.
I need some clarification on a few things. When I read these different posts, it's hard to sort through fact from opinion.

For questions/examples VTI=TSM, VYM=High Dividend Yield Index Fund, VIG=Dividend Growth Index Fund.

1. I understand how a dividend works. When a dividend is paid the fund then drops by the amount of the dividend. I often read about the comparison of people who live off dividends to the people who go for total return. What I do not understand is that when you compare the two strategies it seems a little like apples to oranges because unless the Total Return investor sells the same ratio as the dividend of the dividend investor, you cannot really compare the strategies.

Example:
Portfolio A= 100% VTI
Portfolio B= 100% VYM

If someone is living off the dividends of portfolio B, then yes, they would always have the same amount of shares. But to me (and I am new to this and probably am wrong) you can't compare it to portfolio A unless you are selling the dividend amount of portfolio B from Portfolio A.

What I mean is comparing someone investing in portfolio A and pulling out 3.5% a year shouldn't be compared to someone living off the dividends of Portfolio B. To me it's not the same.

If I have a huge portfolio, I might be ok with portfolio B, but if I had a smaller portfolio, I would be after what has the most growth.

2. When I chart VTI, VYM, and VIG, VTI comes out ahead overall. I know this data only goes back to 2007, which means nothing.
For a tax-advantaged investor in the accumulation stage, I do not see and reason to opt for VYM/VIG over VTI.
Am I missing something?

3. In retirement or the spending stage, yes, I see the appeal of living off dividends, but this may not be possible. Dividends might not be enough, so you'd need to have stocks that still are growing.
If ones portfolio isn't huge, which strategy do you think would be a better option?


4. I have a hard time understanding the logic of an accumulating stage investor taking a percentage away from their VTI allocation to put it in either VYM or VIG. I do see some logic in having VYM/VIG in retirement, but I am clueless as to how one gets from one portfolio to the other.


Thank you for any responses. I am primarily coming from the perspective of an smaller portfolio in all tax deferred accounts. I know these questions would be different for a taxable investor.
Also, I am over half way through Bogleheads Guide to investing, but I haven't read anything yet about these topics.
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livesoft
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Re: Dividend Clarification

Post by livesoft » Fri Dec 15, 2017 2:26 pm

Let me throw this out there:

If both the total return investor and the dividend investor are invested in VTI, then they both get the dividend of VTI no matter what.

Total Return investor takes the dividend money and buys more shares with it (reinvests the dividend).

Income investors takes the dividend money and spends it on expenses like food, shelter, transportation, health care, vacations.

Anytime either investor wants VYM or VIG, they take some money and buy those shares. Where the money comes from doesn't matter, does it?
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alex_686
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Re: Dividend Clarification

Post by alex_686 » Fri Dec 15, 2017 2:30 pm

A quick stab at this. First, let me get on my soapbox...

1. Focus on Total Returns. Its viewpoint is logical and internally consistent. Focusing on Dividend Returns is alluring because it seems simple. However it contains hidden flaws that will blow up in your face in times of crisis.

2. These are different funds with different focuses. The past does not matter, the future does, as you imply. Why do you think one group did better then the rest? Why do you think this will continue in the future? And what does dividends have to do with it?

As an analogy, let us decided you want to date and marry. You notice that women who wear dresses make better wives. At your next date you wonder why you are dating a Scotsmen wearing a kilt.

Dividends are a little like dresses. You want to focus on the fundamental factors that drive Total Returns, like size, value, etc. Dividends are a secondary factor. I could harp on this with many examples - international tax rates, sector clustering, reinvestment, stock buy backs, reinvestment opportunities, agency issues. etc. But they are a secondary factor.

3. Both of these assume that "Dividend Returns" is a valid concept. It is not. It is a intellectual shortcut. "I will just spend my dividends and not touch my principle." Which you have alluded to is not exactly true. So those arguments fall like a house of cards.

4. I am not sure what logic is used to underpin this point. Could you please expand?

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spdoublebass
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Re: Dividend Clarification

Post by spdoublebass » Fri Dec 15, 2017 2:34 pm

livesoft wrote:
Fri Dec 15, 2017 2:26 pm
Let me throw this out there:

If both the total return investor and the dividend investor are invested in VTI, then they both get the dividend of VTI no matter what.

Total Return investor takes the dividend money and buys more shares with it (reinvests the dividend).

Income investors takes the dividend money and spends it on expenses like food, shelter, transportation, health care, vacations.

Anytime either investor wants VYM or VIG, they take some money and buy those shares. Where the money comes from doesn't matter, does it?

I should have been more clear. I understand the difference between an income vs Total Return investor.
What I'm asking is if you reinvest the dividends for both funds.

If you have 20 years to go, I would think you'd be have a larger sum if you just stuck with VTI. That being said, 20 years down the road if have a large amount of shares in a dividend fund isn't a horrible thing either. This is kind of my question.
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alex_686
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Re: Dividend Clarification

Post by alex_686 » Fri Dec 15, 2017 2:36 pm

livesoft wrote:
Fri Dec 15, 2017 2:26 pm
Total Return investor takes the dividend money and buys more shares with it (reinvests the dividend).

Income investors takes the dividend money and spends it on expenses like food, shelter, transportation, health care, vacations.
I will slightly disagree. Both get the same return. The Total Return investors makes a conscious decision on the portion that they want to liquidate for consumption (food, shelter) verse that of reinvestment. The Income investor spends the dividend on consumption and blindly hopes that the dividend increases at least as fast a inflation. Heaven help them if the dividends gets cut.

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Re: Dividend Clarification

Post by livesoft » Fri Dec 15, 2017 2:36 pm

spdoublebass wrote:
Fri Dec 15, 2017 2:34 pm
What I'm asking is if you reinvest the dividends for both funds.

If you have 20 years to go, I would think you'd be have a larger sum if you just stuck with VTI. That being said, 20 years down the road if have a large amount of shares in a dividend fund isn't a horrible thing either. This is kind of my question.
There is no way to predict the future, so I don't predict whether VTI or VIG or VYM will end up in a larger sum in 20 years.
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alex_686
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Re: Dividend Clarification

Post by alex_686 » Fri Dec 15, 2017 2:42 pm

spdoublebass wrote:
Fri Dec 15, 2017 2:34 pm
If you have 20 years to go, I would think you'd be have a larger sum if you just stuck with VTI. That being said, 20 years down the road if have a large amount of shares in a dividend fund isn't a horrible thing either. This is kind of my question.
You would need a smaller sum with VTI. VTI is one of the most efficient portfolios out there. Highest return for unit of risk. The issue is that you need to actively liquidate the "principle" - which requires you to think.

VYM is less efficient. Since it is less efficient you need a large sum to retire. The advantage is that you don't have to think - you can rely on the automatic dividends paying out. Unless something bad happens, like 2008. Or there is a change in the tax law that favors stock buybacks over dividends. Or something else.

And yes, I am getting up on my high horse on this.

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spdoublebass
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Re: Dividend Clarification

Post by spdoublebass » Fri Dec 15, 2017 2:47 pm

alex_686 wrote:
Fri Dec 15, 2017 2:30 pm
A quick stab at this. First, let me get on my soapbox...

1. Focus on Total Returns. Its viewpoint is logical and internally consistent. Focusing on Dividend Returns is alluring because it seems simple. However it contains hidden flaws that will blow up in your face in times of crisis.
I do focus on total return. I run 3 fund portfolio. I just am curious about this because of all the discussion on this forum.

2. These are different funds with different focuses. The past does not matter, the future does, as you imply. Why do you think one group did better then the rest? Why do you think this will continue in the future? And what does dividends have to do with it?
I understand that VYM is value orientated and VIG Growth. I was not trying to debate the merits of the funds. I only reference them because most people do who are discussing dividends.

As an analogy, let us decided you want to date and marry. You notice that women who wear dresses make better wives. At your next date you wonder why you are dating a Scotsmen wearing a kilt.

Dividends are a little like dresses. You want to focus on the fundamental factors that drive Total Returns, like size, value, etc. Dividends are a secondary factor. I could harp on this with many examples - international tax rates, sector clustering, reinvestment, stock buy backs, reinvestment opportunities, agency issues. etc. But they are a secondary factor.

3. Both of these assume that "Dividend Returns" is a valid concept. It is not. It is a intellectual shortcut. "I will just spend my dividends and not touch my principle." Which you have alluded to is not exactly true. So those arguments fall like a house of cards.
What you wrote is exactly why I asked this question. "I will just spend my dividends and not touch my principle" was just posted an hour ago in another thread. I thought it was wrong when I read it then too, so I made this thread.


4. I am not sure what logic is used to underpin this point. Could you please expand?
I'm asking this: Say you have a three fund portfolio. 80/20 AA with 60% of equities in international. So 48% VTI, 32% VXUS (International), and 20% TBM. If you were going to Add a dividend index fund you'd have to make room for it by reducing something else. So if you want a 10% tilt of US in say VYM youd end up with roughly 43% VTI, 5% VYM, 32% VXUS, and 20% BND.

My point is that it's so small, it won't change anything AND you'd be better off with VTI in the first place. That's all I'm asking, how do people justify having these funds in the Accumulation stage?

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livesoft
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Re: Dividend Clarification

Post by livesoft » Fri Dec 15, 2017 3:19 pm

spdoublebass wrote:
Fri Dec 15, 2017 2:47 pm
My point is that it's so small, it won't change anything AND you'd be better off with VTI in the first place. That's all I'm asking, how do people justify having these funds in the Accumulation stage?
They actually don't justify having these funds to me and apparently not to you either. In their own minds, they are justifying them because of emotional needs and expressive wants. Or they are making cognitive errors or emotional errors. This is what some of the research done by behavioral finance types are trying to address.

It's a heavy book to read, but for more on all this, check out Meir Statman's "Finance for Normal People." There are Normal-Ignorant and Normal-Knowledgeable investors. Which type are you? I suspect you are both types depending on your specific actions at certain times.
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Juice3
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Re: Dividend Clarification

Post by Juice3 » Fri Dec 15, 2017 3:47 pm

spdoublebass wrote:
Fri Dec 15, 2017 2:47 pm
I'm asking this: Say you have a three fund portfolio. 80/20 AA with 60% of equities in international. So 48% VTI, 32% VXUS (International), and 20% TBM. If you were going to Add a dividend index fund you'd have to make room for it by reducing something else. So if you want a 10% tilt of US in say VYM youd end up with roughly 43% VTI, 5% VYM, 32% VXUS, and 20% BND.

My point is that it's so small, it won't change anything AND you'd be better off with VTI in the first place. That's all I'm asking, how do people justify having these funds in the Accumulation stage?
VTI and VYM are not interchangeable. VYM carries much more concentrated positions in large "value" stocks than VTI. VYM also 'yields' nearly 63% more than VTI, 2.85% v. 1.76%. Any dividend pursuit strategy would be fundamentally different than a 3 fund strategy where the 3 are US stock, International stock and Bond.

I am not aware of a general reason why an investor an investor in the accumulation phase would be pursing a dividend strategy - or any other variation on the "Dogs of the Dow" strategy.

You may want to look at Note 4 in the "what about bonds? section of three-fund wiki. Suggesting that there is a correlation between dividend paying stocks and bonds. This note identifies an alternative or variation on three fund strategy. VYM would replace one half of your bond allocation. In the example you gave, 48% VTI 32% VXUS 10% VYM and 10% emerging bond. I'd imagine you can find the materials referenced or threads on the site for more reading.

For reference and anyone not familiar with ETFs being discussed:

VTI - Vanguard Total Stock Market ETF
https://personal.vanguard.com/us/funds/ ... irect=true
Product summary
ETF facts
Seeks to track the performance of the CRSP US Total Market Index.
Large-, mid-, and small-cap equity diversified across growth and value styles.
Employs a passively managed, index-sampling strategy.
The fund remains fully invested.
Low expenses minimize net tracking error.

VYM - Vanguard High Dividend Yield ETF
https://personal.vanguard.com/us/funds/ ... irect=true
Seeks to track the performance of the FTSE® High Dividend Yield Index, which measures the investment return of common stocks of companies characterized by high dividend yields.
Provides a convenient way to track the performance of stocks that are forecasted to have above-average dividend yields.
Follows a passively managed, full-replication approach.

Juice3
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Re: Dividend Clarification

Post by Juice3 » Fri Dec 15, 2017 3:57 pm

I should probably give a nod to to articles like this that acknowledge dividends as a significant component of the recovery from 1929 crash.

http://www.nytimes.com/2009/04/26/your- ... 6stra.html

It is always interesting to consider an about to retire person with $300,000 in 1928 DOW and then suddenly there is only $35,000 left. What would you do?
Last edited by Juice3 on Fri Dec 15, 2017 4:01 pm, edited 1 time in total.

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Re: Dividend Clarification

Post by spdoublebass » Fri Dec 15, 2017 3:58 pm

Juice3 wrote:
Fri Dec 15, 2017 3:47 pm

VTI and VYM are not interchangeable. VYM carries much more concentrated positions in large "value" stocks than VTI. VYM also 'yields' nearly 63% more than VTI, 2.85% v. 1.76%. Any dividend pursuit strategy would be fundamentally different than a 3 fund strategy where the 3 are US stock, International stock and Bond.
You are right. A dividend strategy would be different. I didn't take that into account. However, I do read often that people hold a mix of VTI/VYM. Again, I'm not advocating for this, I'm only asking what am I missing. I don't don't see it, and I'm still in my first year with all of this.
Juice3 wrote:
Fri Dec 15, 2017 3:47 pm
spdoublebass wrote:
Fri Dec 15, 2017 2:47 pm


You may want to look at Note 4 in the "what about bonds? section of three-fund wiki. Suggesting that there is a correlation between dividend paying stocks and bonds. This note identifies an alternative or variation on three fund strategy. VYM would replace one half of your bond allocation. In the example you gave, 48% VTI 32% VXUS 10% VYM and 10% emerging bond. I'd imagine you can find the materials referenced or threads on the site for more reading.
Yeah, I head of this.....
You are right this probably is how they are adding the Dividend index funds to their portfolios. But It's mentioned everywhere though that this is not a great idea. Yield chasing and all that.

Thanks for the post. I forgot those two points and it changes some things in seeing their perspective.
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patrick013
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Re: Dividend Clarification

Post by patrick013 » Fri Dec 15, 2017 4:14 pm

To really succeed at the dividend possibility you need to have
an index that is either yield weighted or equal weighted. Ticker
VYM is not. Secondly, to get all the yield and total return
possible it needs to go into a Roth with reinvestment. Otherwise
it's a decision related to income needs in a possible down market
with the related capital gains thrown in.

Has good history and strategy like that. Just FYI.
age in bonds, buy-and-hold, 10 year business cycle

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