Been drinking the VTI "kool aid"... but considering SCHD, JEPI, VYM, etc.

[HankWilliams]

Hi,
I'm 48 with basically no debt. I've been into FIRE, VTI, etc since 2016ish.

I have over 2500 shares of VTI. I have other stocks (HD, V, T, Nisource, and more) as well in taxable and non taxable accounts. Roth, HSA, all maxed. Some def pay dividends.

I'll keep on buying VTI through the years and based on the rule of 72, hopeful growth, more contributions, etc... I think my VTI will grow and who knows... maybe I'll have 4000 shares eventually.

But I've been watching Youtube vids on "living off dividends". The Jim Collins philosophy is tainted... with thoughts of diversifying. I'm torn now and had to ask the FIRE/MMM world.
https://www.youtube.com/watch?v=lqZxmaSuKog
https://www.youtube.com/watch?v=IrGkATCWA0Y
https://www.youtube.com/watch?v=k44m4VvZCyU

SCHD, JEPI and others seem tempting. Curious what y'all suggest. Thank so much.

[Stimpy]

So I expect more people here are going to poo poo SCHD and other dividend specific etfs.   And to be fair the current yield for many of them are under 2% (schd is currently .83%) so living off say... 20k.  is ~2 million invested.... and that, is not a guarantee of income.  Just a likely scenario.   (A problem with dividend investing is that you will need to invest for MORE then your expected income just in case of cuts, etc.)

Plus if your going the dividend route, you might need to consider taxes, pending on where you're growing it.  I don't find it all that bad but many here are very...  unhappy... on that subject with dividends.

Do I recommend it.  Not unless your willing to learn the risks that come with a dividend investing income.  Cause it is different then just general investing for harvesting of income.  It is a little more work in general then just investing in VTI and forgetting about it.

[Rob_bob]

I'm sure most replies will be to invest for total return and sell shares to create an income and it will be more tax efficient.  Hold some fixed income to sell when equities are down.

I have been retired since Sept. 2020.  Personally I have a mix of growth and dividend holdings, I don't see it as either or, one way or the other.  I'm heavy in equities with some cash, I don't sell anything for income I just transfer my dividends to a bill paying account just like when I got a paycheck.  So far it works for me.

[BicycleB]

In theory, as Rob_bob pointed out, the income distributed as dividends in the stocks held by SCHD would, in VTI, be distributed partly through capital gains. This allows you to choose when to receive the income, because you sell VTI shares at the time of your choosing. Advantage VTI.

SCHD has a different advantage right now, though. It's out of favor! Its stock price is falling in a year where VTI and other benchmarks (notably Nasdaq) are soaring. Now might be a great time to buy some SCHD.

More generally, since SCHD and VTI have different sets of stocks within them, a strategy of having some VTI plus some SCHD could give your portfolio a stability that neither one alone could provide. Most of the time, the portfolio would rise less but also fall less that either one separately. If you rebalance annually to a fixed percentage, in theory the diversification might produce a better risk-adjusted return than having just one fund or the other.

[ChpBstrd]

There's an easy way to find the stocks that will underperform in the next few years. Just sort by the ones paying high dividends!

If you're looking for fixed income, there are bank CDs and IG bonds yielding 5-6% all over the place. Just don't lend your money to one of the companies borrowing at 5%+ just to pay dividends to SCHD shareholders until they go bankrupt!

[mistymoney]

So I expect more people here are going to poo poo SCHD and other dividend specific etfs.   And to be fair the current yield for many of them are under 2% (schd is currently .83%)

My quote on tdameritrade says the yeild is 3.66%.

[Scandium]

There's an easy way to find the stocks that will underperform in the next few years. Just sort by the ones paying high dividends!

If you're looking for fixed income, there are bank CDs and IG bonds yielding 5-6% all over the place. Just don't lend your money to one of the companies borrowing at 5%+ just to pay dividends to SCHD shareholders until they go bankrupt!

That's a good point. For at least the 10+ years I've been reading about investing there's been a pretty sizable, and vocal, group of people pumping dividend stocks ("never touch principal!!! *rolleyes..). Wonder if this will have to pop at some point? Or maybe this group is small enough to not have any effect on the market when they all sell and move on to the next.

[Must_ache]

High dividend stocks are likely to offer a lot less growth.  Receiving dividends can be a great way to avoid taxes (go to the Curry Cracker site where he shows you his income tax forms year after year).  Let's look at the returns going back to January 2012, 11.5 years ago:

SCHD currently about yields 3.5% and grew +86.8% or +5.6%/yr.  Annualized return 3.5% + 5.6% = 9.1%
VYM (another dividend etf) currently yields about 3.1% and grew +143.2% or +8.0%/yr.  Annualized return 3.1% + 8.0% = 11.1%
Nasdaq currently yields about 1.2% and grew +420.1% or +13.3%/yr.  Annualized return 1.2% + 13.3% = 14.5%

Sure, any dividend ETF will give you more cash to live off of and will tend to be stable.  Dividend money doesn't grow on trees - it means the fund will tend to grow less, and also says something about the business as well.  There's nothing wrong with having stable dividend style funds in your portfolio, I have some, but not let's pretend these are magic beans or a goose that lays golden eggs....

Also if a fund offers a very high yield (7%+) the value of the fund is almost certainly declining.  You can get a guaranteed 7% but if you are losing 3%/yr in value you might be better off with a CD.  Case in point YYY which is currently yielding about 12.3% but over the last 11 years lost -4.8%/yr.  12.3% - 4.8% = 7.5% worse than SCHD.  But if dividends are what you want, YYY is your fund but expect to lose half your principal every decade.
 

[Must_ache]

Another thing they don't tell you...
Let's say you have $1M and you can get a juicy and stable 3.5% dividend (but no growth which hopefully is absurd unless you are buying T-bills).  That means you are set to collect $35,000/yr FOR LIFE!!!  Let's assume that is the purchasing power you need.
That's great, but let's assume inflation is only 2%.  Next year you are going to need 35,000 x 1.02 = 35,700.  That means your fund will need to start at 35,700 / 0.035 = $1,020,000.  So you can only spend $15,000 of those dividends, the other $20,000 have to be reinvested.  You gained 3.5% but inflation took 2% of that away so you really only have 1.5% to live on.  That's why the total return is important.  You would only be getting $35,000 equivalent per year if your fund were getting 2% appreciation each year to offset the inflation.  That's not a big ask, it's quite small really (3.5% dividend + 2.0% appreciation long term) but you're not likely to hear that in a youtube video. 

[LightStache]

Incorporating some SCHD is sound. The VTI-and-hold idea is popular because it's simple and replicates FIRE research with respect to investment returns. But you could argue that SCHD more closely resembles historical markets because dividend yields have been on a steep decline over the past 30 years.

If you look at the past ten years, SCHD returned 11.6% vs. VTI's 12.1%. As you might expect, SCHD had lower volatility with a .89 beta vs. 1.02 for VTI. SCHD also had superior alpha. These profiles are pretty close, obviously in a different ballpark than CDs or IG bonds.

More generally, since SCHD and VTI have different sets of stocks within them, a strategy of having some VTI plus some SCHD could give your portfolio a stability that neither one alone could provide. Most of the time, the portfolio would rise less but also fall less that either one separately. If you rebalance annually to a fixed percentage, in theory the diversification might produce a better risk-adjusted return than having just one fund or the other.

Agreed. And if you're backtesting this at the portfolio level, you could probably trade a couple percent of fixed income to equities to match VTI total returns with overall lower volatility. I might model that out when I'm in a less lazy mood.

Edit: OK so I did a quickie in portfolio visualizer. Reference portfolio was 80% VTI / 20% BND. Test portfolio was 41% VTI / 41% SCHD / 18% BND. As I suspected, the test portfolio had similar overall returns, 10.68% CAGR vs 10.64% for the reference. The volatility with the test portfolio was meaningfully lower though, stdev 11.59% for the test vs. 12.01% reference and max drawdown 19.2% for the test vs. 22.7% for the reference.

But there's a big problem with that analysis, which is that SCHD only goes back to Nov 2011. Results could be meaningfully different over long time spans.

So I ran a similar comparison using VTSMX, VEIPX, and VBMFX (same percent ratios) to bring us all the way from May 1992. Results are surprisingly similar. The test portfolio has a CAGR of 8.95% vs. 8.83% for the reference. The volatility with the test portfolio was lower, stdev 11.4% vs. 12.3% for the reference. There was no meaningful difference in the max drawdown.

[Car Jack]

I have become a complete dividend hater in taxable.  In tax advantaged stuff, who cares?  But in taxable, every time dividends spill out, you get tax liability.  You might think "who cares?  I reinvest anyways".  Well, if you do, you now have stock at a new date, so long term cap gains are a year away.  So be careful what you sell.

I'm particularly focused on this as I'm about to retire (Friday) and will be going on Medicare a week after that.  I've always heard about IRMMA, but never paid attention until now.  I now know that because of my salary 2 years ago, my part B goes up by about $164 a month, pretty much doubling that rate and part D goes up as well.  Staying under $194k in income keeps the rate to $164 plus nothing and the normal part D rate plus nothing.  Sounds like a big income until I add up dividends, interest, a little 1099 income and then it drops to like $140k.  When you're doing Roth conversions, this becomes a stopping point for me.  I figured this out a few years ago, so my taxable with VTI and SCHB in it has been tax loss harvested whenever I can do it, buying instead BRK/b which pays no dividends.  Going forward, I'll continue to do a bit of selling and buying to lose as much dividends as I can.  I've also taken my overly big hoard of cash in anticipation of no more salary and buying more BRK/b in my taxable.

In tax advantaged, it doesn't matter because it's all going to be taxed at ordinary income anyways.

[Telecaster]

Incorporating some SCHD is sound. The VTI-and-hold idea is popular because it's simple and replicates FIRE research with respect to investment returns. But you could argue that SCHD more closely resembles historical markets because dividend yields have been on a steep decline over the past 30 years.

It is sound...for some people maybe.  If you are in accumulation phase it is almost certainly a bad idea.  And as @Car Jack points out, it might be a bad idea in the drawdown phase as well.   And that same problem applies to people who want ACA subsides and doing Roth conversions too.

But in exchange for the headaches, dividend strategies also give you lower total returns.   

It it worthwhile to look at why dividend yields have been declining all these years--and it isn't because total returns have been dropping.   The reason is that dividends are a tax inefficient way of returning money to investors, and investors increasingly don't want them.   

[Telecaster]

That's a good point. For at least the 10+ years I've been reading about investing there's been a pretty sizable, and vocal, group of people pumping dividend stocks ("never touch principal!!! *rolleyes..). Wonder if this will have to pop at some point? Or maybe this group is small enough to not have any effect on the market when they all sell and move on to the next.

Anytime there is a bear market or the market just goes sideways for while, the dividend guys come out of the woodwork.   Then the market takes off and these guys go away until the next bear.   Depending on how persistent the current bull market is we might be stuck with them for a while.   

[Steeze]

I think of spending dividends more as a progression beyond the 4% SWR:

1) FU Money
2) FI @ 4% SWR
3) FI w/ Perpetual Withdrawl Rate (PWR) (3.5% +/- over very long periods)
4) FI w/ spending = dividends
5) FI w/ spending < dividends with exponential runaway growth expected

#2 - may have some principal remaining at death, potentially more
#3 - likely to have principal remaining at death, potentially more
#4 - guaranteed to have principal remaining at death, potentially more
#5 - guaranteed to have significantly more principal remaining at death

I don't think I would chase yield for any reason, but this idea works with VTI / VTSAX just fine. If you chase yield to get to #4 early, you risk losing purchasing power over time. Really this should be a yield equivalent to VTI / SP500.

In any case, I have always thought that you should have your FI money in something basic like VTI + Cash at a reasonably low ratio, and if you want to diversify into something less volatile (or more risky!), do it with the 'extra' beyond your 25x

[ChpBstrd]

That's a good point. For at least the 10+ years I've been reading about investing there's been a pretty sizable, and vocal, group of people pumping dividend stocks ("never touch principal!!! *rolleyes..). Wonder if this will have to pop at some point? Or maybe this group is small enough to not have any effect on the market when they all sell and move on to the next.

Anytime there is a bear market or the market just goes sideways for while, the dividend guys come out of the woodwork.   Then the market takes off and these guys go away until the next bear.   Depending on how persistent the current bull market is we might be stuck with them for a while.

You're right, there does seem to be a cycle to it. I'll add a couple more categories, in my opinion:

Correction / recession phase: "my portfolio is 100% bonds yielding 3%" doomers
Early recovery phase: goldbugs
Established bull market phase: growth stock & crypto stans
Early signs of contraction: dividend stock proponents

Any of these phases can last years so it's possible to miss the change of seasons. But in each phase the investment everyone is excited about is the exact opposite of what you would ideally want to do in that phase, reflecting backward-looking regrets and forward-looking FOMO.

The ideal time to go defensive is the "early signs" phase or earlier, not once the correction has already happened. The ideal time to get into growth stocks is during the correction/recession, not several years later when growth stocks have already risen and you're chasing performance to absurd valuations.

Investment fads announce the seasons like migrating waterfowl or the appearance of cicadas.

[Scandium]

Early signs of contraction: dividend stock proponents

Any of these phases can last years so it's possible to miss the change of seasons. But in each phase the investment everyone is excited about is the exact opposite of what you would ideally want to do in that phase, reflecting backward-looking regrets and forward-looking FOMO.

I agree, except I feel you're giving the dividend-bros too much credit. My sense is they really come out it force in the middle of a growth market, or even earlier. Proclaiming that "a crash is imminent! Dividends are never cut, they're safe!" Except this can go on for years, where they sit on (defensive) stocks going sideways, but oooh; yielding 3.5%! Some of them are a bit like a toned-down version of gold-bugs (who are toned-down versions of the Preppers..)