Author Topic: Different kinds of index investing  (Read 2565 times)

lordmetroid

  • Stubble
  • **
  • Posts: 112
Different kinds of index investing
« on: November 12, 2016, 04:11:40 AM »
Currently, I am in the accumulation phase of my FIRE plan and am using regular market capped index as my investment vehicle. I have made an active choice of using this index as this index represent the best business chosen by the collective wisdom of the market participants.

However, during the withdrawal phase a regular market capped index is less suitable as an investment vehicle. Instead I can imagine a high dividend yield index such as SDIV which consist of the top high dividend paying stocks around the world and have a yearly dividend of around 7-8%. Owning shares in businesses I never have to sell which pay their shareholders a substantial amount of their profits is in my view more sustainable and also would require a less of a stash.

Is my reasoning flawed?

mizzourah2006

  • Pencil Stache
  • ****
  • Posts: 552
  • Location: NWA
Re: Different kinds of index investing
« Reply #1 on: November 12, 2016, 07:04:50 AM »
The saying don't chase yield exists for a reason. Take a look at the holdings. They definitely aren't your blue chips. Diversification in poor holdings is still a poor holding. Admittedly I don't know a ton about that fund but if the yield of an index fund is 7.25% I am starting to wonder why.

frugal_c

  • Bristles
  • ***
  • Posts: 255
Re: Different kinds of index investing
« Reply #2 on: November 12, 2016, 07:45:26 AM »

If you want to get a higher dividend yielding etf, unless you have done substantial due dilligence I would buy something from ishares or vanguard.  They have some high dividend etfs that are around 4% and much safer than this.  Companies that I have seen yielding 7-8% tend to be pretty sketchy and they often go bankrupt during economic crisis.

Classical_Liberal

  • Handlebar Stache
  • *****
  • Posts: 1169
  • Age: 44
Re: Different kinds of index investing
« Reply #3 on: November 12, 2016, 02:43:23 PM »
Dividend growth investing is a legit alternative to indexing, IMO.  I don't know anything about the specific fund in the OP.  Do your due diligence, can you diversify enough on your own, many DGI believe they can.  Part of the problem is always going ot be transaction costs and tax consequences in actively moving your capital.

Woody Viet

  • 5 O'Clock Shadow
  • *
  • Posts: 66
Re: Different kinds of index investing
« Reply #4 on: November 12, 2016, 03:30:44 PM »
Definitely do your due diligence. Buying good quality companies at reasonable prices which pay the majority of their profits out as dividends could work great. You should be able to tilt your yield upwards and if you run on the assumption of only spending your cash flows and not touching your capital it could be a stable way to fund RE (it's how I invest personally).

Is it easy? The devil is in the detail. Are these companies economically sound? Are they funding dividends by taking on debt (a lot do!)? Have you considered foreign withholding taxes? If you're going with an index are you comfortable with the potential tracking error regret that goes along with it?

Don't let me put you off. It's just a lot more work

lordmetroid

  • Stubble
  • **
  • Posts: 112
Re: Different kinds of index investing
« Reply #5 on: November 12, 2016, 04:51:29 PM »
Dividend growth investing is a legit alternative to indexing, IMO.  I don't know anything about the specific fund in the OP.  Do your due diligence, can you diversify enough on your own, many DGI believe they can.  Part of the problem is always going ot be transaction costs and tax consequences in actively moving your capital.
I would of course use a tax advantaged account available in Sweden where I do not need to pay any taxes on dividends.

MustacheAndaHalf

  • Magnum Stache
  • ******
  • Posts: 2937
Re: Different kinds of index investing
« Reply #6 on: November 12, 2016, 10:07:47 PM »
Comparing Vanguard High Yield fund (VYM) to the S&P 500 provides an interesting comparison: one earned 7.0% / year and the other 6.9% / year for the past 10 years.  No real performance difference between higher and lower dividends - meaning you get the money in dividends or in growth, but it amounts to the same thing.

In the US there's a difference: you are not taxed on your original cost when selling shares, but are taxed on all of the dividend.

Indexer

  • Handlebar Stache
  • *****
  • Posts: 1463
Re: Different kinds of index investing
« Reply #7 on: November 12, 2016, 10:08:16 PM »
However, during the withdrawal phase a regular market capped index is less suitable as an investment vehicle.

Why?  I think this statement is completely false. You wouldn't want it by itself. You would likely want some international exposure and bond exposure, but you could still use index funds for that.

Something like VTI pays dividends, but it is invested in thousands of companies so it is very well diversified. Some of them pay dividends, some don't, some are big, some are little, some are healthcare, some are utilities, some are tech, etc. It is diversified. The non-dividend paying growth companies will hopefully give you long term growth and you can pull from that just as easy as a dividend.

Oh, and SDIV may pay high dividends, but it has underperformed VTI over the past 3 and 5 year periods... by A LOT! Quoting both as of 9/30(I didn't cherry pick the date, it's the date reported on both websites):
VTI is 10.42% for 3 years and 16.33% for 5 years.
SDIV is 4.56% for 3 years and 8.99% for 5 years.

Oh, and if the annual returns during a bull market are less than the dividend yield that would imply that the companies within the fund are going down in value. Total return - income return = capital return. 4.56 - 7.49 = -2.93%.  These companies might have really high dividend yields not because the dividends went up, but because the value of the stock dropped.

I looked through the holdings and I didn't do any in depth analysis, but my back of napkin conclusion is that is concentrated in small no-name banks, small no-name investment firms, mortgages, and property management companies. It didn't exist in '08, but if we had another banking crisis I wouldn't want to own this.

I'll stick with VTI. ;)

gerardc

  • Pencil Stache
  • ****
  • Posts: 767
  • Age: 36
  • Location: SF bay area
Re: Different kinds of index investing
« Reply #8 on: November 13, 2016, 02:31:57 AM »
However, during the withdrawal phase a regular market capped index is less suitable as an investment vehicle. Instead I can imagine a high dividend yield index such as SDIV which consist of the top high dividend paying stocks around the world and have a yearly dividend of around 7-8%. Owning shares in businesses I never have to sell which pay their shareholders a substantial amount of their profits is in my view more sustainable and also would require a less of a stash.

Is my reasoning flawed?

What matters is total return, whether it's from dividends or growth is irrelevant. I don't see the appeal of dividend funds if their total return isn't higher. Is it purely for your convenience of withdrawing only the dividends and the accounting/tax simplifications of never having to sell? This is negligible IMO.

Dividend funds aren't safer, they can drop in value and then their 7-8% yield will correspond to only 5-6% (say) of your original stash amount.