nisiprius wrote: ↑
Tue Feb 11, 2020 8:34 pm
VEIPX, the Vanguard Equity-Income fund, is a fund in a category that used to be better known: a stock fund that's intended to provide dividend income. It's actively managed but I'm going to use it because it goes back to 1988, much farther back than VHDYX. If we compare VEIPX (blue) to the Vanguard 500 Index Fund (orange), we see that in terms of total return, how much money each fund made one way or the other, they were a close match most of the time. The dividend fund didn't participate as heavily in the big bull market of the late 1990s; you could say, it didn't get caught up as much in the bubble; whether that's a good thing or a bad thing depends on your point of view. But, overall, about the same.
People like to put microscopes on small differences, and it's common to claim that selecting stocks with high dividends means selecting management that cares about shareholder value or whatever... just as some people claim that stocks with high loadings on the value factor are better, or whatever. But, overall, about the same.
If dividends were a free lunch, extra money on top of the same capital appreciation, then their accumulation and reinvestment would loft the blue curve farther and farther above the orange curve. That didn't happen. Every year, both funds made about the same amount of money, except for the late nineties, when the S&P 500 fund made more for a while and then gave it all back.
If, however, instead of showing total return, we set the chart to show price only, we see a huge difference. In terms of price per share, the S&P 500 fund (orange) grew far, far more than the dividend-oriented fund (green).
So is the S&P 500 fund (orange line) hugely better? Of course not. Was the dividend fund (green line) hugely better? No. Both funds made and in most years they made just about the same amount of money, they just made it in different ways. The dividend fund investors received much more money in dividends. And the S&P 500 fund paid out much less in dividends, but almost exactly made up for it in capital appreciation.
Another way to say it is that the S&P 500 companies kept most of their earnings inside
their stock shares, using it to invest in themselves and grow the company. The stocks in the dividend fund didn't keep as much of their earnings, but handed it out to shareholders instead.