Thanks for the responses! Good stuff here. Just to clarify, I'm not trying to engage in a debate here about the worth of dividend investing. Rather, I want to surface any pros, cons, or questions I haven't yet considered.
I guess my biggest reservation is that dividend stocks move with the market as well. So I don’t see that you’re going to avoid pain if the overall market takes a dump. Also, not all dividends are created the same in my view. Some of these dividend stocks look like dogs...
Yes, dividend stocks move with the market. However, as I got closer to FIRE, I stopped caring much about the share prices of my holdings. Instead, all I really care about now is my yield and annual income.
In order to avoid high, but poor-quality dividends, I follow the lead of the model portfolio in Morningstar DividendInvestor. I don't know enough (or care to know enough) to properly gauge the quality of a stock's dividend - in terms of sustainability and growth prospects.
lets see what you got.
I'm not trying to convince you that my strategy is right for you. Again, I'm just trying to surface pros, cons, and questions. Less aggression, please.
Share growth is also "substantial" and more so than dividends.
I'm saying that the
income (not total return) I earn is substantial in comparison to total market index-based alternatives - ~4.08% vs. 1.81% for VTI and 1.83% for VTSAX. I'll emphasize that qualifier more.
Only in time of economic stability, at which time so are all other stocks.
By "stable", I mean that stock prices yoyo up and down constantly, whereas dividend rates are (relative to stock prices) very stable and rise steadily (although cuts do happen).
I'd love to see a valid reason-based explanation how having more paid out as dividends instead of less is more tax efficient and not less tax efficient.
By "tax-advantaged", I mean from the perspective of the post-retirement investor, not the corporation. The tax rate for qualified dividends is 0% for single filers with taxable income up to $38,600 and married filers with taxable income up to $77,200. Of course, the same goes for long-term capital gains.
Since dividends are certainly not stable and consistent during times that you need them to be (economic turbulence)...
Post-retirement, I derive 100% of my income from dividend payments, which requires no selling. In comparison, I would find needing to sell shares to bring in income to be rather stressful, partly because I would then come to care about share price again. In comparison to share prices, dividend rates are much more stable.
5. inflation-proof
Admittedly, "inflation-aware" or "inflation-resistent" might be better terms here. Anyway, a worthwhile dividend-paying
stock grows at a rate that is, to some degree, greater than inflation. For those stocks, the
dividend rate tends to rise in a similar fashion (faster than inflation).
You might instead go with Vanguard High Dividend Yield (VYM), which has a 3.3% dividend yield. But that would shoot down your tax efficiency argument: every year, you'd pay taxes on 3.3% instead of 1.8%.
By "tax-advantaged", I mean from the perspective of the
post-retirement investor. Pre-retirement is a different story, which you have called-out. It's a good point, and I've added that to the cons. Thanks!
So what specific things do you buy to do your index investing?
I don't currently engage in any index investing.
I think you need to discuss asset allocation strategy, especially if you are using REIT, BDC, MLP, or bonds.
I do cover that. Thanks! However, this could be worth an additional point, as I believe that most/all total market indexes eschew MLPs and REITs, whereas I (and the model portfolio) don't.
...I would only say that it might make sense for someone who is retired (or very low income and intends to stay that way) and whose income allows for the dividends to be taxed at 0%.
Good point. Looks like that was brought up three times. I'll have to be sure to stress it.
Again, thank you. More thoughts are welcome.