Author Topic: Advantages of low dividend yield?  (Read 674 times)

One

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Advantages of low dividend yield?
« on: August 25, 2018, 02:03:04 PM »
Once you've maxed out all of your retirement plan opportunities would low dividend funds be the best option for taxable accounts assuming high tax brackets? If you're reinvesting dividends it seems as though the lower paying dividend funds would be better because the companies are growing faster and you don't have the tax burden. When you hit retirement the yield will be smaller but on a presumed higher dollar fund amount.

maizeman

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Re: Advantages of low dividend yield?
« Reply #1 on: August 25, 2018, 02:17:44 PM »
My two biggest concerns would be 1) how does the ER of this hypothetical fund compare to a standard index fund? and 2) how representative is it of the overall market as a whole?

1). S&P 500 currently has a dividend yield of 1.90%. On qualified dividends, you might end up paying 23.8% if you are in a high enough tax bracket. If the alternative "low dividend" fund cuts your dividend payout in half, that means an increase in expense ratio of even 0.27 percentage points is enough to wipe out any benefits from tax savings. If you find a "no dividend" fund, it takes a larger increase in expense ratio to completely wipe out the tax savings, but it could still cut into them significantly. And a no-dividend fund makes the potential for #2 even worse.

2) Naively excluding companies that pay above average dividends (or any dividends) would likely mean your index would be very underweight for economic sectors like "Basic Materials" "Financials" and "Utilities" where higher dividend payouts are common. You'll also tend to be overweight big tech stocks that don't pay any dividend at all (think Google, Facebook, and Amazon). For the last couple of years being overweight in those several stocks would have been a winning strategy. It may or may not continue to do so.

People can do some complicated uneven weighting to try to replicate the sector distribution of the overall stock market even though they are investing in a small and non-random subset of the companies in the index, but that will tend to make #1 even worse.

One

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Re: Advantages of low dividend yield?
« Reply #2 on: August 25, 2018, 02:30:20 PM »
I was looking at VYM vs VOO vs VUG. expense ratio looks similar, I guess I see some advantage to the lower dividend of VUG. Maybe the higher risk is worth the reward if already maxed out in retirement and in high tax bracket?

maizeman

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Re: Advantages of low dividend yield?
« Reply #3 on: August 25, 2018, 02:47:48 PM »
VYM is high dividend, so I don't quite see how it applies.

VOO (1.88% yield) vs VUG (1.16%) difference of 0.72% in dividend yield. So we're talking a maximum total tax drag of 0.17%/year for VOO in extremely high federal tax brackets (and you lose one basis point of that to the difference in expense ratios.) In order to get this reward avoid this tax drag you drop from ~500 companies in your index to ~300 and the percent of the total fund invested in just the top three countries grows from 22% to 33%, which is a BIG change.

So from my perspective, it is a quite small maximum possible reward, and the risk is potentially large, and -- more importantly -- hard to quantify. So for me it doesn't sound like an appealing trade-off. YMMV.
« Last Edit: August 25, 2018, 03:09:56 PM by maizeman »

jacoavluha

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Re: Advantages of low dividend yield?
« Reply #4 on: August 25, 2018, 02:52:29 PM »
total return matters most

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Re: Advantages of low dividend yield?
« Reply #5 on: August 25, 2018, 03:46:38 PM »
As the fed raises interest rates do the dividend yields of these funds tend to rise as well?

maizeman

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Re: Advantages of low dividend yield?
« Reply #6 on: August 25, 2018, 03:56:37 PM »
Only if the rise in interest rates is fast enough to cause a stock market crash.

Aside from right during the great recession crash, the dividend yield of the S&P 500 index has been pretty stable at 2% give or take since the mid-to-late 1990s, while the Federal funds rate has ranged from ~0% to 6% and 30 year mortgage interest rates have ranged from ~3.3% to 8.3%.

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Re: Advantages of low dividend yield?
« Reply #7 on: August 25, 2018, 04:31:06 PM »
Only if the rise in interest rates is fast enough to cause a stock market crash.

Aside from right during the great recession crash, the dividend yield of the S&P 500 index has been pretty stable at 2% give or take since the mid-to-late 1990s, while the Federal funds rate has ranged from ~0% to 6% and 30 year mortgage interest rates have ranged from ~3.3% to 8.3%.

Okay, I was thinking that as bond yields increase values stocks would have to increase yields to compete causing a larger divide between growth and value yields.