Help me Built a Dividend Growth Investment Portfolio

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bei22000
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Help me Built a Dividend Growth Investment Portfolio

Post by bei22000 » Wed Jan 09, 2019 1:50 pm

As I am approaching my retirement (about 10-12 yrs), I want to gradually develop a more conservative portfolio with both tax-free and taxable accounts. I would like to invest in more value-based equity earning dividends so I will have some monthly income down the road. I have come across some investment newsletters or books introducing a dividend portfolio in which you buy a list of individual dividends stocks, such as Verizon, Johnson & Johnson. At the same time, I have seen some dividend ETFs that generate dividends too, such as VYM. I am wondering if You just need to invest a few good dividend ETF or Index funds instead of owning a whole basket of individual stocks that I need to monitor. Please advise. thank you.

KyleAAA
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Re: Help me Built a Dividend Growth Investment Portfolio

Post by KyleAAA » Wed Jan 09, 2019 1:56 pm

Most here would advise against an explicit dividend strategy, but I think there are worse approaches. I would definitely avoid buying individual stocks and suggest sticking with ETFs. Tilting HALF (probably no more than half) of your domestic stock allocation to VYM and half your international stock allocation to VYMI is not a bad portfolio so long as you are aware of the tax implications.

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JoMoney
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Re: Help me Built a Dividend Growth Investment Portfolio

Post by JoMoney » Wed Jan 09, 2019 2:02 pm

I do not use a dividend focused portfolio, and wouldn't recommend it to others.
That said, I can see the appeal it has to people, and there may be limited circumstances where it's appropriate.
I believe there is a distinction between "Dividend Growth" and "High Dividend Yield" styles of investing. I believe looking for a history of strong dividend growth is a bit of a tilt towards "quality", and may not necessarily pay out higher income than a broad market index. A focus on "High Dividend Yield" may tilt towards companies that are under some sort of duress, or have low expectations for capital growth.
There are many ways to go about selecting individual stocks, but I'm very skeptical of the ability of average investors to gain any advantage by doing so. I think they are more likely to be taken advantage of, or hurt themselves, from lack of experience, bad information, poor diversification, etc..
If I was going to invest in one of those dividend stock investing styles, I would use a broad market index fund such as those offered by Vanguard (VIG for dividend growth, or VYM for high dividend yield). I believe such broad market indexes will approximate the performance of most investors attempting to invest using those styles or selection criteria, and does so at a very low cost. Personally, I use even broader market index funds, that approximates the investment returns of stock investors using all the different styles and at even lower cost ;)
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

WhiteMaxima
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Re: Help me Built a Dividend Growth Investment Portfolio

Post by WhiteMaxima » Wed Jan 09, 2019 2:07 pm

Only in tax-advantage account. VIG.

bloom2708
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Re: Help me Built a Dividend Growth Investment Portfolio

Post by bloom2708 » Wed Jan 09, 2019 2:10 pm

If you hold Total US and Total International you will get ~2% dividends. There is 2% of your withdrawal. If you need 4%, then you sell shares to get another 2%.

Dividends are no panacea. Reaching for them can lead to undiversified portfolios and a tax drag.

Best to read up on Total Return. Some income from dividends/withdrawal and some from selling shares (that are appreciating over time).
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

Jack FFR1846
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Re: Help me Built a Dividend Growth Investment Portfolio

Post by Jack FFR1846 » Wed Jan 09, 2019 2:20 pm

For taxable, you want the opposite. Stocks that pay no dividends, such as Berkshire Hathaway, which is probably the most famous. Getting high paying dividend stocks in taxable means you're paying tax on those high dividends. With a no-dividend stock, you sell LTCG shares when you need to and pay less tax. Either way, you'd want to be highly diversified, which is not so easy to do be designating dividend or no dividend stocks.
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bei22000
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Re: Help me Built a Dividend Growth Investment Portfolio

Post by bei22000 » Wed Jan 09, 2019 2:29 pm

THANK YOU VERY VERY much for all your input. :!: I know I will get useful information here. :)

drzzzzz
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Re: Help me Built a Dividend Growth Investment Portfolio

Post by drzzzzz » Wed Jan 09, 2019 2:32 pm

Most won't recommend your approach or do it themselves, but look at the following - all offered by Vanguard VHDYX - Vanguard High Dividend Index of VDIGX - Vanguard Dividend Growth as well as VIG or VYM (both etfs)

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bei22000
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Re: Help me Built a Dividend Growth Investment Portfolio

Post by bei22000 » Wed Jan 09, 2019 3:01 pm

drzzzzz wrote:
Wed Jan 09, 2019 2:32 pm
Most won't recommend your approach or do it themselves, but look at the following - all offered by Vanguard VHDYX - Vanguard High Dividend Index of VDIGX - Vanguard Dividend Growth as well as VIG or VYM (both etfs)
Thank you for the post. In your opinion, which one is better vig or vym? should I get both if buying?

alex_686
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Re: Help me Built a Dividend Growth Investment Portfolio

Post by alex_686 » Wed Jan 09, 2019 3:06 pm

I will warn you away from a value strategy. Value has higher returns and higher risks than total market.

I will also warn you away from a dividend strategy. The theory behind it is weak. Historical it has worked fine until it doesn't, and then you find yourself in a pit of pain.

The simple answer is to use the total returns framework. A more complex answer is to build a portfolio where the factors are loaded on "Low Beta" and "Quality" stocks.

3funder
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Re: Help me Built a Dividend Growth Investment Portfolio

Post by 3funder » Wed Jan 09, 2019 3:13 pm

JoMoney wrote:
Wed Jan 09, 2019 2:02 pm
I do not use a dividend focused portfolio, and wouldn't recommend it to others.
That said, I can see the appeal it has to people, and there may be limited circumstances where it's appropriate.
I believe there is a distinction between "Dividend Growth" and "High Dividend Yield" styles of investing. I believe looking for a history of strong dividend growth is a bit of a tilt towards "quality", and may not necessarily pay out higher income than a broad market index. A focus on "High Dividend Yield" may tilt towards companies that are under some sort of duress, or have low expectations for capital growth.
There are many ways to go about selecting individual stocks, but I'm very skeptical of the ability of average investors to gain any advantage by doing so. I think they are more likely to be taken advantage of, or hurt themselves, from lack of experience, bad information, poor diversification, etc..
If I was going to invest in one of those dividend stock investing styles, I would use a broad market index fund such as those offered by Vanguard (VIG for dividend growth, or VYM for high dividend yield). I believe such broad market indexes will approximate the performance of most investors attempting to invest using those styles or selection criteria, and does so at a very low cost. Personally, I use even broader market index funds, that approximates the investment returns of stock investors using all the different styles and at even lower cost ;)
+1

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nisiprius
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Re: Help me Built a Dividend Growth Investment Portfolio

Post by nisiprius » Wed Jan 09, 2019 3:16 pm

Warning, I don't use any kind of dividend-focussed approach myself.

1) Important: Dividend fans talk about several different kind of dividend strategies. Dividend growth is supposed to be a way of identifying stocks that will be just plain better than the average. High dividend yield is supposed to be a good way of drawing some sustainable regular income from a stock portfolio without making any decisions about yourself about how much is safe to draw. Be sure you understand which dividend strategy you are following and why.

2) If you want to have a fairly traditional Boglehead three-fund portfolio, simply consider swapping one of these three funds in, in place of the Vanguard Total Stock Market Index Fund:

a) For actually drawing income by "spending only the dividends," and getting a higher dividend than a total market or S&P 500 fund, consider:

a1) Vanguard High Dividend Yield Index Fund, VHDYX (= VYM) (blue on chart below)
a2) Vanguard Equity-Income Fund, actively managed, VEIPX or VEIRX (Admiral shares, $50,000 minimum) (orange),

b) For investing in what some people believe to be a superior category of stocks:
Vanguard Dividend Appreciation Index Fund, VDADX ( = VIG) (green)

What the following chart shows is that if you substituted any of these for Total Stock (yellow), and reinvested dividends, the total return and the overall growth of any of the them would be just about the same. Indeed, all of them grew $10,000 to an amount within the range $23,500 ± 4%.

Source

Image

The bottom line is that there hasn't been a heck of a lot of difference. So if you have a strong personal conviction based on something more than soundbites from dividend advocates, and if you have a withdrawal strategy based on "spend the dividends, whatever they happen to be, believing they will be sustainable and won't fluctuation too much," then it is appropriate to consider slotting in a dividend-focussed fund in place of Total Stock.

Watch out for dividend advocates using them as a stalking horse for stock-picking. "Dividend stocks are great, but of course many of them are overpriced, so you need my help in identifying the good ones..." Or, "What, a dividend index fund didn't outperform a total market index fund? Oh, I don't use or like dividend index funds myself, I have a portfolio of individual dividend stocks." Or, to put it another way, "I'm a stock-picker, and I like to pick from the universe of dividend stocks."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Topic Author
bei22000
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Re: Help me Built a Dividend Growth Investment Portfolio

Post by bei22000 » Wed Jan 09, 2019 3:31 pm

thanks. Great. I have learned a lot from your guys and will not build a dividend-focused portfolio. Instead I will just use the broad market funds as I am doing now and will buy vanguard high dividend yield fund to add my total portfolio ( investing a small percentage)

Monster99
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Re: Help me Built a Dividend Growth Investment Portfolio

Post by Monster99 » Wed Jan 09, 2019 7:00 pm

I would recommend that you follow a "total return" strategy and go for tax effient funds have been mentioned above. I am retired and focused on dividend paying funds and now I am trying to unwind 25 years of fund purchases that are very tax inefficient to improve my holdings.

Generator515
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Re: Help me Built a Dividend Growth Investment Portfolio

Post by Generator515 » Wed Jan 09, 2019 7:09 pm

I switched away from it a long time ago but if you are considering it, don't blindly follow the vanguard route.

I like Schwab for it. They have multiple commission free ETFs with dividends in mind. In particular I like SCHD and DGRW. I feel like both have stronger portfolios and a better track record than VIG.

FinancialRookie
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Re: Help me Built a Dividend Growth Investment Portfolio

Post by FinancialRookie » Wed Jan 09, 2019 7:57 pm

First, let me say that I use a total market ETF approach in my pre-tax and Roth accounts.

Secondly, I use a dividend approach for my taxable account, I am in the 12% tax bracket now and for the foreseeable future so my dividends are taxed favorably. I use the DJIA. 10 of the companies are dividend aristocrats, a number are dividend achievers, and almost half of the remaining stocks have dividend growth rates in the double digits. There is a less than 1% turnover rate, and currently yields about 2.7% when weighting the aristocrats at 4% of the portfolio and the remaining stocks at 3% each.

Some of the best economists, investors, and advisers comprise the index, and when they add and/or remove a company from the index you can choose to follow suit or not based on potential tax implications.

ER's are 0 by holding the individual securities, and the index acts as a guide that you can set and forget to a certain extent.

I know most people on here won't agree with my approach but it is a nice small addition to my overall portfolio. Tracking an index helps me out by taking some information overload with fundamentals.

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Re: Help me Built a Dividend Growth Investment Portfolio

Post by ChinchillaWhiplash » Wed Jan 09, 2019 8:39 pm

You might want to look at REIT funds too. VNQ and VNQI have good yields. Wisdom Tree has several dividend based factor funds also, including EM and Internatioal small cap. Expense ratios are a little on the high side, but yields are good.

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bei22000
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Re: Help me Built a Dividend Growth Investment Portfolio

Post by bei22000 » Thu Jan 10, 2019 12:34 pm

Generator515 wrote:
Wed Jan 09, 2019 7:09 pm
I switched away from it a long time ago but if you are considering it, don't blindly follow the vanguard route.

I like Schwab for it. They have multiple commission free ETFs with dividends in mind. In particular I like SCHD and DGRW. I feel like both have stronger portfolios and a better track record than VIG.
I do have schwab account and will look into it.
Thank you :sharebeer

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nedsaid
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Re: Help me Built a Dividend Growth Investment Portfolio

Post by nedsaid » Thu Jan 10, 2019 12:39 pm

A dividend strategy is just fine. I think you have to be realistic about what such a strategy can accomplish for you. An income stream that grows a bit faster than inflation is very appealing. The biggest problem that I have with a dividend strategy is that many of our portfolios just won't be big enough to live off of only interest and dividends, most of us will have to harvest capital gains as well. So probably a total return strategy is what most of us will pursue.

Whatever you do, don't chase yield for the sake of yield. The US Stock Market Yield is about 2%, you might reach to 3% but don't go too much further than that. Higher yielding investments often tend to sort of liquidate themselves over time. Folks chased the Energy Master Limited Partnerships only to find that a few of these went bust when energy prices fell. Don't chase preferred stock either. Sometimes high yields on a stock cannot be sustained.
Last edited by nedsaid on Thu Jan 10, 2019 12:43 pm, edited 1 time in total.
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alex_686
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Re: Help me Built a Dividend Growth Investment Portfolio

Post by alex_686 » Thu Jan 10, 2019 12:40 pm

FinancialRookie wrote:
Wed Jan 09, 2019 7:57 pm
Some of the best economists, investors, and advisers comprise the index, and when they add and/or remove a company from the index you can choose to follow suit or not based on potential tax implications.
I will point out that that the primary value of the DJIA, according to Dow Jones, is its long history. They think that market weighted cap indexes are the way to go, and that the DJIA is a bit of a relic.

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