Dividend investing vs. index investing

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Momus
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Dividend investing vs. index investing

Post by Momus » Tue Nov 05, 2019 2:56 am

Which one is better? in Youtube, it looks like dividend investing is all in the rage. I know that every dividend payout results in lowering stock price of equal amount. How are people bragging about getting a force selling event every month on their shares in the form of dividend? Enlighten me :?

Which one is a better strategy over the long term?

fwellimort
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Re: Dividend investing vs. index investing

Post by fwellimort » Tue Nov 05, 2019 3:41 am

If I knew the future, I would tell you but I don't so that's my response.

Like most people here, I say : No one really knows.

Also, ignore a lot of videos related to finance and all.
It might be possible dividend investing might just be much better on tax advantaged accounts. Who knows.

There are indexes catered towards high dividends and all. Indexing is just a collection of investments grouped together at end of day.

So we are technically not even comparing the right products. Anyways, hope that answered your curiousity [basically, no one here really knows the future in absolute terms so no one here can guarantee "this investing will be better than that long term"].
Last edited by fwellimort on Tue Nov 05, 2019 3:44 am, edited 1 time in total.

Thesaints
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Re: Dividend investing vs. index investing

Post by Thesaints » Tue Nov 05, 2019 3:42 am

Dividend investing is index investing too. There are countless indexes out there.

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BeBH65
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Re: Dividend investing vs. index investing

Post by BeBH65 » Tue Nov 05, 2019 5:04 am

Op,
There are regularly threads on dividend investing;
Which arguments did you find the most compelling?
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). | Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles

bberris
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Re: Dividend investing vs. index investing

Post by bberris » Tue Nov 05, 2019 5:24 am

Momus wrote:
Tue Nov 05, 2019 2:56 am
Which one is better? in Youtube, it looks like dividend investing is all in the rage. I know that every dividend payout results in lowering stock price of equal amount. How are people bragging about getting a force selling event every month on their shares in the form of dividend? Enlighten me :?

Which one is a better strategy over the long term?
Is that you, Corey?

https://familyguy.fandom.com/wiki/Corey

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nisiprius
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Re: Dividend investing vs. index investing

Post by nisiprius » Tue Nov 05, 2019 7:15 am

Dividend investing has been "all the rage" for roughly a century. It is one of a number of strategies promoted by enthusiasts, like contrarian investing, or value investing, or factor investing. There are innumerable claims that certain easily-identified categories of stock are Just Plain Better than stocks in general: low-volatility stocks, mid cap stocks, small-cap value stocks.

Dividend investing and index investing are not exclusive. There are several indexes that focus on aspects of dividend payment, and probably a couple of dozen index funds and ETFs that track them. From Vanguard, for example, you have the Vanguard High Dividend Yield Index Fund and the Vanguard Dividend Growth Index Fund.

Yes, a surprising number of naïve investors that think that dividends are a free lunch. If you can get stocks that don't pay dividends and stocks that do pay dividends, isn't it obvious that it's better to get the dividends, too? No. OK, we know that's just plain wrong and we don't have to discuss it. It does make it easy to market the strategy to new investors, however.

Non-naïve dividend enthusiasts might well understand that there's even a theorem in financial economics, the Modigliani-Miller theorem, that says that under a set of assumptions, dividends shouldn't matter. But dividend enthusiasts often argue that, is that regardless of theory, selecting dividend stocks is a good formula for identifying certain management styles that (they think) lead to superior results.

Factor enthusiasts might well agree that dividend stocks are better, but would argue that it is just because dividend stocks load heavily on certain factors, and that it is better to get the factor exposure by focussing on the factors themselves, not on something else that just happens to be a sloppy and imprecise way to get the same factors.

The results of looking at the actual behavior, in terms of total return, of dividend-focussed index funds, is not very compelling, and in a taxable account even equal total return, getting less of the return in the form of dividends may be better.

Vanguard High Dividend Yield, VHDYX, blue, versus Vanguard Total Stock Market Index, VTSMX, orange:

Source
Image

It is very noticeable that "dividend investing" is often stock-picking in disguise. When confronted with "meh" performance of dividend-oriented index funds, a common enthusiast's response is "O, I don't use index funds for my dividend investing." It turns out that rather than being an easy formula for superior results, dividend investing is simply a prescreen for identifying a universe of stocks to pick from, but within that universe you are expected to use your keen eye for value and only pick the good one. In other words, dividend investing isn't really dividend investing at all. It's just a way of saying "I do subjective stock-picking, and I like dividend stocks."
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UpperNwGuy
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Re: Dividend investing vs. index investing

Post by UpperNwGuy » Tue Nov 05, 2019 7:27 am

Ahhh... Yet another example of the never-ending quest for
nisiprius wrote:
Tue Nov 05, 2019 7:15 am
certain easily-identified categories of stock are Just Plain Better than stocks in general
When will we ever learn?

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RickBoglehead
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Re: Dividend investing vs. index investing

Post by RickBoglehead » Tue Nov 05, 2019 7:35 am

Momus wrote:
Tue Nov 05, 2019 2:56 am
Which one is better? in Youtube, it looks like dividend investing is all in the rage.
I guess my response would be similar to when someone asks me if buying X on eBay is a good idea vs from a company 5hat sells the item itself. eBay, and Youtube, are platforms. Anyone can post on them, which gives them zero credibility.

Dividends lower the share price so one has not made anything. But now you pay income tax in those dividends.

Selling a holding to generate the same amount of money generates a capital gain, hopefully a long term one. Capital gains are taxed at a lower rate.

Therefore, dividend generation is a bad idea.
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snailderby
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Re: Dividend investing vs. index investing

Post by snailderby » Tue Nov 05, 2019 7:40 am

OP, are you asking about (1) investing in individual dividend stocks or (2) investing in an ETF that targets (a) high dividend stocks or (b) stocks that have consistently increased their dividends over the years?
Last edited by snailderby on Tue Nov 05, 2019 8:50 am, edited 1 time in total.

Admiral
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Re: Dividend investing vs. index investing

Post by Admiral » Tue Nov 05, 2019 7:46 am

The simple answer is taxation: taxation (based on current code) is lower for LTCG than for dividends, and when the taxes are paid can be controlled by selling shares, while taxes on dividends cannot be controlled as timing is determined by the company.

Keep in mind that indexes also pay dividends, though typically the return is smaller than stocks that goose their dividends.

The more complex answer has to do with why companies pay high dividends in the first place, but I'm not going to go into that.

billfromct
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Re: Dividend investing vs. index investing

Post by billfromct » Tue Nov 05, 2019 7:53 am

Rick,

I'm no tax expert, but aren't "qualified" dividends & long term capital gains taxed at the same Federal tax rate for most people?

My understanding is that most (not all) dividends from U.S. companies are "qualified" dividends.

bill

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Re: Dividend investing vs. index investing

Post by Admiral » Tue Nov 05, 2019 7:59 am

billfromct wrote:
Tue Nov 05, 2019 7:53 am
Rick,

I'm no tax expert, but aren't "qualified" dividends & long term capital gains taxed at the same Federal tax rate for most people?

My understanding is that most (not all) dividends from U.S. companies are "qualified" dividends.

bill
Exactly.

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RickBoglehead
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Re: Dividend investing vs. index investing

Post by RickBoglehead » Tue Nov 05, 2019 8:10 am

billfromct wrote:
Tue Nov 05, 2019 7:53 am
Rick,

I'm no tax expert, but aren't "qualified" dividends & long term capital gains taxed at the same Federal tax rate for most people?

My understanding is that most (not all) dividends from U.S. companies are "qualified" dividends.

bill
Last year's Vanguard list. Plenty of funds that aren't near 100% qualified dividends. https://personal.vanguard.com/us/insigh ... ncome-2018
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firebirdparts
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Re: Dividend investing vs. index investing

Post by firebirdparts » Tue Nov 05, 2019 8:34 am

Investing is better than not investing. That is the important thing by a mile.

There are many crazy and stupid people who take an interest in investments, and even they are still correct some of the time. This is certainly an argument for a balanced portfolio of index investments. On the other hand, money is good. This is certainly an argument for dividends.

So enjoy your fleeting life with the results of all your hard work. If you backtest stuff, you can certainly formulate an opinion, but if you change the backtest dates, you can probably formulate the opposite opinion.
A fool and your money are soon partners

tibbitts
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Re: Dividend investing vs. index investing

Post by tibbitts » Tue Nov 05, 2019 8:45 am

Momus wrote:
Tue Nov 05, 2019 2:56 am
Which one is better? in Youtube, it looks like dividend investing is all in the rage. I know that every dividend payout results in lowering stock price of equal amount. How are people bragging about getting a force selling event every month on their shares in the form of dividend? Enlighten me :?

Which one is a better strategy over the long term?
How did you establish "all in the rage"?

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David Jay
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Re: Dividend investing vs. index investing

Post by David Jay » Tue Nov 05, 2019 8:45 am

“Just Plain BetterR”- nisiprius may have a new fund idea...
Last edited by David Jay on Tue Nov 05, 2019 9:08 pm, edited 1 time in total.
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JoMoney
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Re: Dividend investing vs. index investing

Post by JoMoney » Tue Nov 05, 2019 8:48 am

Using dividends as a selection signal for stock picking isn't the worst strategy, but it tends to put people into portfolios that could otherwise be more diversified and have less active turn over.
I could list countless dividend focused mutual funds, with decades of history, and performance that was 'ok', about on par with the broad index averages, with some differences here and there... but it's nothing special.

Of note though, is there was a brief historical period in the late 1970's through early 1980's where small cap stocks, value stocks, and lots of strategies that varied from the broad market had an exceptionally large burst of out-performance. Dividend stocks are often a weaker form of "value stocks" and depending on the strategy used, may have seen some out-performance over that historical period. I am skeptical that the results over that time period can be projected forward as some sort of "risk premium" or superiority of one strategy or another.
"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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David Jay
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Re: Dividend investing vs. index investing

Post by David Jay » Tue Nov 05, 2019 8:52 am

tibbitts wrote:
Tue Nov 05, 2019 8:45 am
Momus wrote:
Tue Nov 05, 2019 2:56 am
...in Youtube, it looks like dividend investing is all in the rage.
How did you establish "all in the rage"?
That’s the beauty of YouTube - watching a video will produce recommendations for videos on similar topics. An automatic paradigm reinforcing mechanism...

I was looking for a video on how to replace a part on my truck. I found one and YouTube presented me with a list of dozens of videos on the same topic.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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patrick013
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Re: Dividend investing vs. index investing

Post by patrick013 » Tue Nov 05, 2019 9:13 am

Dividend index funds should lower the beta of any portfolio. Price beta and/or return beta. Return/std. dev. ratio is usually on the high side also. So the portfolio should have more stability and upward volatility. Ticker VPU is great for that. Factor funds include SPHD, PEY, and SPYD where the dividend is a large part of total return. Frequently over 4% dividend yield. If anything beats the 500 I think these will. Total return after tax is what really matters.
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Re: Dividend investing vs. index investing

Post by snailderby » Tue Nov 05, 2019 10:05 am

I don't do this, but if you wanted to, you could create a pie in M1 Finance in a traditional or Roth IRA with roughly 50 companies compiled from the holdings of REGL. That would save you REGL's 0.40% ER and give you a midcap tilt.

14.67% CAGR | 13.82% Stdev | -33% maximum drawdown
07.09% CAGR | 14.93% Stdev | -51% maximum drawdown

(Historical comparison from Portfolio Visualizer, since 1998.)

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Momus
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Re: Dividend investing vs. index investing

Post by Momus » Tue Nov 05, 2019 4:40 pm

If dividend ETF perform more or less about the same as index fund with less drawdown, I think it's a winner in my opinion.

Is there any period where Vanguard dividend aristocrats etf underperformed the index by a large margin?

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Momus
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Re: Dividend investing vs. index investing

Post by Momus » Tue Nov 05, 2019 4:40 pm

snailderby wrote:
Tue Nov 05, 2019 10:05 am
I don't do this, but if you wanted to, you could create a pie in M1 Finance in a traditional or Roth IRA with roughly 50 companies compiled from the holdings of REGL. That would save you REGL's 0.40% ER and give you a midcap tilt.

14.67% CAGR | 13.82% Stdev | -33% maximum drawdown
07.09% CAGR | 14.93% Stdev | -51% maximum drawdown

(Historical comparison from Portfolio Visualizer, since 1998.)
Wow...

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firebirdparts
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Re: Dividend investing vs. index investing

Post by firebirdparts » Tue Nov 05, 2019 5:01 pm

Momus wrote:
Tue Nov 05, 2019 4:40 pm

Wow...
Now if we could only do that in the future.
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Re: Dividend investing vs. index investing

Post by nisiprius » Tue Nov 05, 2019 5:14 pm

Momus wrote:
Tue Nov 05, 2019 4:40 pm
If dividend ETF perform more or less about the same as index fund with less drawdown, I think it's a winner in my opinion.

Is there any period where Vanguard dividend aristocrats etf underperformed the index by a large margin?
I don't know "how big is large." A $10,000 investment in VIG, dividends reinvested, underperformed VTI by $866.80 over the 12-month period 3/2009 through 2/2010. Yes, of course, I picked this particular period because it is the worst 12-month period for VIG, compared to VTI.

Source

Image
Last edited by nisiprius on Tue Nov 05, 2019 5:20 pm, edited 1 time in total.
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Jwulgaru
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Re: Dividend investing vs. index investing

Post by Jwulgaru » Tue Nov 05, 2019 5:18 pm

Dividends investing has become somewhat less appealing to me since I started making enough money to push me out of the 12% bracket. However, the dividend stock/index-oriented part of my overall portfolio is only ~25% or so. To me, building up a dividend machine that pays me out rising income is another piece of the financial security puzzle.

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Re: Dividend investing vs. index investing

Post by arcticpineapplecorp. » Tue Nov 05, 2019 5:54 pm

Momus wrote:
Tue Nov 05, 2019 2:56 am
Which one is better? in Youtube, it looks like dividend investing is all in the rage. I know that every dividend payout results in lowering stock price of equal amount. How are people bragging about getting a force selling event every month on their shares in the form of dividend? Enlighten me :?

Which one is a better strategy over the long term?
young padawan, you have much to learn. Read here:
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https://www.advisorperspectives.com/art ... sacred-cow
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viewtopic.php?t=227902
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Re: Dividend investing vs. index investing

Post by bloom2708 » Tue Nov 05, 2019 6:03 pm

Kind of like asking do you like fruit or apples?

:arrow:
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GibsonL6s
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Re: Dividend investing vs. index investing

Post by GibsonL6s » Tue Nov 05, 2019 6:10 pm

I think think dividend investors believe that one day they will be able to "live off" the dividends and so it gives them the comfort that they are protected from market downturns. This can lead to chasing yield to provide the income needed. I read a book by Geraldine Weiss which promoted using dividend yields as a part of a method to value and pick stocks. If one followed her method you probably did fine if you bought enough diversified stocks, but in the end, as we know it is hard to buy a large bunch of stocks that will outperform an index fund.

As I like to say, the way you get rich is to concentrate your investments, unfortunately it is also the way to get poor.

Good luck.

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Re: Dividend investing vs. index investing

Post by navyasw02 » Tue Nov 05, 2019 8:16 pm

Dividend investing is fine if you buy and hold a diverse basket of quality stocks that pay a consistently increasing dividend. You can build your own index fund essentially and collect dividends when you desire to use it as an income stream without significant reduction of principal. Note that dividends are not free money, they are a small pseudo sell that creates a taxable event.

JustinR
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Re: Dividend investing vs. index investing

Post by JustinR » Wed Nov 06, 2019 12:19 am

Dividend investors are just misguided souls who will have less money.

Admiral
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Re: Dividend investing vs. index investing

Post by Admiral » Wed Nov 06, 2019 11:36 am

JustinR wrote:
Wed Nov 06, 2019 12:19 am
Dividend investors are just misguided souls who will have less money.
LOL.

I honestly think that most dividend proponents simply do not understand what dividends are or how they work. They think they are like simple interest or bond coupon payments.

One of the very few things one can control when investing is taxes. Why would you let others (that is, companies) control your taxes when you can control them yourself?

If you want steady income... buy bonds.

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