Dividend Investors??

[nexus]

So for the last 4+ years I’ve been buying nothing but index funds. But as I understand it, in order to fund my FIRE lifestyle I’ll have to live off their dividends PLUS sell some shares each year to get my 4% withdrawal rate.

So can someone explain why it’s less common/less acceptable to leverage dividend stocks/ETFs/mutual funds?

What about monthly paying dividend ones?

I’m sure it’s mostly psychological and that an index fund provides better returns but I’d appreciate the reaffirmation.

Also, does vanguard have any index or mutual funds that pays dividends monthly?

Thanks in advance. (It’s unlikely that I’ll switch from index funds but I may start dabbling (5% or less of my NW) with some frequent dividend payers depending on what folks say in this thread). 

[deborah]

There are various different sectors within the share market - they include mining companies, banks, retailers, technology companies... Each sector tends to have a different dividend ratio. For instance, mining companies are spending a lot of money on equipment to enhance their mining operations, so they tend to have low dividends. Banks, on the other hand, don't have much equipment, and tend to have high dividends.

You CAN get indexes that concentrate on different sectors, and there are some indexes that are "high dividend" indexes. If you were to only go after high dividends, you would be concentrating on one portion of the market, so you would tend, overall to get less return.

Also, high dividends can be a problem. Mining companies start out needing a lot of money to set up, so they produce low dividends. When the mine is fully set up, and they can't expand it because they have covered the entire area with their equipment, the mining company may offer high dividends, because they don't need that much equipment. BUT, they are possibly about to stop producing their mineral, so this may be a terrible time to buy the stock, even though it's giving good dividends.

[ctuser1]

Dividends are great.

But.. There are some drawbacks with dividends!!

They are taxed. If the company decided to return capital as buyback, the net financial impact is the same, but at the same time it does not trigger a mandatory taxable event.

The above point bears some explanation. If you assume that the markets are efficient, and you can perfectly value companies, a company would be worth = it's intrinsic value. Let's assume the intrinsic value is $100. If it pays $10 in dividends, the intrinsic value drops to $90, you get $10 cash AND you have to pay taxes on the $10.

If the company did not pay the dividend, or bought back shares, intrinsic value stays the same.

If you need income, you have to sell and potentially pay capital gains - but then you get a lot of control and can manage what/when of selling based on tax efficiency. If you are using Vanguard funds they already take care of a lot of tax efficient maneuvers for you!

Net net, it is not the most financially advantageous situation to own a dividend paying asset - everything else being equal. However, I bet you will do fine with dividend investing. Most companies paying dividends are stable blue chips and tend to do great over the long term.