Author Topic: Dividend Portfolio vs. Index Fund  (Read 32828 times)

SaintM

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Dividend Portfolio vs. Index Fund
« on: February 13, 2015, 04:33:12 PM »
It's no secret on here that I prefer dividend stocks.  My hope is to live strictly off the income and never have to touch he asset. There have been some vocal disagreements with that position.  However, I'm always willing to try new ideas and test assumptions.

I am considering opening two new accounts with $10k each. In one account, I will buy $1400ish each of my 7 core holdings. In the other, I will buy a single stock index fund, but I need you all to help me choose one. I will set both accounts to automatically reinvest dividends, otherwise I won't touch either account for years--probably long after MMM quits blogging. Both accounts will be taxable, so I will keep track of the taxable income and rate for each.

Indexer

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Re: Dividend Portfolio vs. Index Fund
« Reply #1 on: February 13, 2015, 04:55:11 PM »
Total Stock Index.  (Vanguard of course)

Low cost = 0.05%
Its highly tax efficient.  You will pay taxes on dividends, but its highly unlikely to spit out capital gains until you sell it.
Right now you lack diversification.  The total stock index has over 3500 stocks. 


I would also add Total International stock index, but thats just me.

beltim

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Re: Dividend Portfolio vs. Index Fund
« Reply #2 on: February 13, 2015, 04:59:44 PM »
I would think you'd want to match nationality and market cap characteristics - so if your 7 core holdings are US based large caps, then the S&P 500.  If they include international or smaller cap stocks, then you'd choose a different index.

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Re: Dividend Portfolio vs. Index Fund
« Reply #3 on: February 13, 2015, 05:19:40 PM »
I did this very thing a year ago...sort of.

Purchased 10K in VDADX Admiral Shares
and 10K in VTSAX Admiral Shares

After one year, the VDADX returned 14% and VTSAX 13% plus the VDADX has a higher dividend yield.

VDADX expense ratio = 0.10
VTSAX expense ration = 0.05

Grande

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Re: Dividend Portfolio vs. Index Fund
« Reply #4 on: February 13, 2015, 06:51:12 PM »
Another vote for the Vanguard Total Stock Index.

Wolf359

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Re: Dividend Portfolio vs. Index Fund
« Reply #5 on: February 13, 2015, 07:00:00 PM »
Is the idea to test your stock picking ability against an index?  Or to test a strategy that emphasizes dividends against a straight index?  How did you go about picking your stock portfolio?

What was the controversy or the challenge?

The single fund that might best replicate the 4-stock passive index strategy would be Vanguard LifeStrategy Growth.

A single fund that best replicates a dividend strategy against an index is Vanguard Dividend Appreciation.

If you're trying to compare your specific dividend strategy against an index, it would be nice to know what your strategy is.

skyrefuge

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Re: Dividend Portfolio vs. Index Fund
« Reply #6 on: February 13, 2015, 09:13:57 PM »
I don't question dividend-focused investors because I think that dividend-paying stocks are poor investments. I question dividend-focused investors because their focus on dividends is often an indicator that they have only a superficial understanding of the stock market, and that could have negative consequences on their long-term investing success.

And this post does not help to alter that impression.

It really makes no sense to set a "dividend portfolio" against an "index fund", because those two things are not opposing strategies. Index funds are dividend portfolios. Here are two comparisons that would be more-correctly symmetrical in their opposition:

1) An active stock-picking strategy vs. passive buy-and-hold indexing.
2) A dividend portfolio vs. a non-dividend portfolio.

#1 you're already doing, since you don't have to actually buy the index side of things; you can just track that from public data. Investing exclusively in dividend-paying stocks can be part of an active strategy, but that doesn't mean dividends are a relevant factor in the competition (again, my whole crusade against a dividend-focus is based on this fact). That's because the index has no idea that it's supposed to care either way about dividends. (unless you choose a dividend-focused index fund, so I guess a subset (1a) could be "active dividend stock-picking vs. passive buy-and-hold dividend indexing")

#2 would have nothing to do with indexing, since there is no such thing as an anti-dividend mutual fund. So that would just be a comparison of two different stock-picking strategies, and since I've never seen anyone advocate for an anti-dividend stock-picking strategy, that test would answer a question no one even asked.

That said, if this "competition" is just a way for you to ease into index investing without having 5-years-ago-you call you a pussy and a sellout*, then go with Vanguard's Total Market Index, VTSAX. Approximately 50% of the ~3800 stocks it holds currently pay dividends. But it's even more dividend-heavy than that, since 84% of the 500 biggest companies (which dominate the index) currently pay dividends. Hopefully that helps you see the false equivalence you're setting up here?

* And no, no one is actually going to call you a pussy or sellout. Changing beliefs upon new information is actually super-admirable.

** But now I am reminded of an unintentionally hilarious post from Dividend Growth Investor where he hems and haws over whether he should keep some non-dividend paying stocks that fell in his lap. "But I'm a dividend investor! I have a blog that I foolhardily tied to a particular investing strategy, so I'm locked in! What would my readers think?!" (obviously I maliciously paraphrase!) In the end, he decided to hang on to them, saying entirely sensibly (and this time quoted verbatim) "The more important thing is for those companies to be able to grow earnings per share. In addition, it is possible that they pay a dividend at some point in the future." Holy shit, that's exactly what I would say! Normally I would give him huge props for that realization, except that it doesn't seem like it's fully sunk in yet, and, really dude, that's your stock-picking strategy? I had at least been giving these stock-pickers the benefit of the doubt on their picking strategy, but "oops, what's this stock that someone threw at me? Hmm, looks ok I guess, sure, I'll keep it" ain't no strategy!

SaintM

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Re: Dividend Portfolio vs. Index Fund
« Reply #7 on: February 13, 2015, 09:38:36 PM »
This is more of an experiment for myself, and $20k is small change compared to the rest of the portfolio.  I do not have the inclination to calculate dividend reinvestment over the last 5 years. That would require getting each dividend amount and trying to locate the price on the payment date.

My goal is to accumulate enough dividend and rental income to fund our lifestyle, my kids' when We are gone, and so on without having to sell assets. At an average 5% yield, that is not a problem. With a mutual fund at less than 2%, that goal isn't going to happen...I will have to sell assets.  If after several years, the mutual fund provides a higher return, perhaps the goal changes.

BTW, I've been called much worse things.

Dodge

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Re: Dividend Portfolio vs. Index Fund
« Reply #8 on: February 13, 2015, 11:54:35 PM »
My goal is to accumulate enough dividend and rental income to fund our lifestyle, my kids' when We are gone, and so on without having to sell assets. At an average 5% yield, that is not a problem. With a mutual fund at less than 2%, that goal isn't going to happen...I will have to sell assets.

I'm with Skyrefuge on this one.  The statement above shows a superficial understanding of the stock market.  If you're expecting a 5% yield, it doesn't matter if it's through dividends, or by selling assets.  You will never run out of either.  Dividends are mathematically equivalent to selling stock.

johnny847

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Re: Dividend Portfolio vs. Index Fund
« Reply #9 on: February 13, 2015, 11:57:23 PM »
This is more of an experiment for myself

Clearly. You've asked for help in setting up this experiment. Skyrefuge has provided a clear response on why this experiment doesn't actually answer a question of merit, because you're thinking of comparing one dividend portfolio to another dividend portfolio. And then you've ignored absolutely everything skyrefuge said, aside from what "no one is actually going to call you a pussy or a sellout"


Le Barbu

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Re: Dividend Portfolio vs. Index Fund
« Reply #10 on: February 14, 2015, 06:07:51 AM »
And some day, it may worth to sell some asset instead of harvesting dividends because of tax laws. If capital gains would be taxed at lower rates than dividends...

I think this experiment just drift you appart from your goal

Le Barbu

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Re: Dividend Portfolio vs. Index Fund
« Reply #11 on: February 14, 2015, 06:12:45 AM »
Focus on what you can control

Saving rate
Asset allocation
Fees & expenses
Minimising taxes
Time being invested

johnny847

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Re: Dividend Portfolio vs. Index Fund
« Reply #12 on: February 14, 2015, 08:17:52 AM »
And some day, it may worth to sell some asset instead of harvesting dividends because of tax laws. If capital gains would be taxed at lower rates than dividends...

I think this experiment just drift you appart from your goal
In the US at least, capital gains on assets held for more than a year are taxed at the same rate as qualified dividends, which are dividends from US and some foreign stocks that are held for at least 60 days in a 121 day window centered at the ex dividend date.

For long term investing, OP should be able to meet both requirements.

Wolf359

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Re: Dividend Portfolio vs. Index Fund
« Reply #13 on: February 14, 2015, 03:15:30 PM »
I don't question dividend-focused investors because I think that dividend-paying stocks are poor investments. I question dividend-focused investors because their focus on dividends is often an indicator that they have only a superficial understanding of the stock market, and that could have negative consequences on their long-term investing success.

And this post does not help to alter that impression.
That sounds like your problem, not his problem.  Many passive index investors have only a superficial understanding of the stock market as well.  I freely admit my own stock market is superficial and not very deep.  I am not in expert in stock picking.  That's why I'm following a passive index investing strategy.  It promises reasonable returns without me having to become an expert.  For that matter, much of the public at large has either a flawed or no understanding of the market at all (and are completely uninvested as a result.)  Who cares if dividend-focused investors don't "get it?" 

If a given strategy works, it is irrelevant how knowledgeable or flawed the investor's knowledge was.

One thing for the OP to consider, however, is that the passive indexing strategy most commonly espoused here is, in fact, a dividend strategy.  The S&P 500 index generates a 1.7% yield.  84% of the companies on the S&P 500 pay dividends.  Thus, following a passive indexing strategy over the long term will still result in an investment that provides an income stream.  After the portfolio reaches the desired size, it could be further tweaked to move into dividend-centric investments to enhance the income stream. 

Another consideration is that blind pursuit of dividend yield alone is a flawed strategy.  The stocks that produce the highest dividends tend to have one of two characteristics: 1) the stock price has plummeted due to fundamental problems with the company (low stock price + unchanged dividend = high dividend yield); 2) the stock is in an industry that has a history of high dividend yields (such as utilities, tobacco, or oil).  That second issue may leave you overly concentrated in specific sectors -- not a good move for long-term growth (no diversification if, say, the price of oil drops unexpectedly.)

In terms of comparing your strategy against a passive indexing strategy, use your current portfolio performance and compare it against the performance of Vanguard LifeStrategy Growth (VASGX).  There's no need to actually buy two dual portfolios for the comparison.  This would let you compare over longer timeframes as well, depending on how long ago you started your portfolio.

Dodge

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Re: Dividend Portfolio vs. Index Fund
« Reply #14 on: February 14, 2015, 03:30:17 PM »
I don't question dividend-focused investors because I think that dividend-paying stocks are poor investments. I question dividend-focused investors because their focus on dividends is often an indicator that they have only a superficial understanding of the stock market, and that could have negative consequences on their long-term investing success.

And this post does not help to alter that impression.
That sounds like your problem, not his problem.  Many passive index investors have only a superficial understanding of the stock market as well.  I freely admit my own stock market is superficial and not very deep.  I am not in expert in stock picking.  That's why I'm following a passive index investing strategy.  It promises reasonable returns without me having to become an expert.  For that matter, much of the public at large has either a flawed or no understanding of the market at all (and are completely uninvested as a result.)  Who cares if dividend-focused investors don't "get it?" 

If a given strategy works, it is irrelevant how knowledgeable or flawed the investor's knowledge was.

There's a difference between choosing a passive indexing approach, while not completely understanding how the market works, and actively seeking out a dividend portfolio, because you think dividends = free money.

RapmasterD

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Re: Dividend Portfolio vs. Index Fund
« Reply #15 on: February 14, 2015, 05:05:27 PM »
I don't question dividend-focused investors because I think that dividend-paying stocks are poor investments. I question dividend-focused investors because their focus on dividends is often an indicator that they have only a superficial understanding of the stock market, and that could have negative consequences on their long-term investing success.

And this post does not help to alter that impression.
That sounds like your problem, not his problem.  Many passive index investors have only a superficial understanding of the stock market as well.  I freely admit my own stock market is superficial and not very deep.  I am not in expert in stock picking.  That's why I'm following a passive index investing strategy.  It promises reasonable returns without me having to become an expert.  For that matter, much of the public at large has either a flawed or no understanding of the market at all (and are completely uninvested as a result.)  Who cares if dividend-focused investors don't "get it?" 

If a given strategy works, it is irrelevant how knowledgeable or flawed the investor's knowledge was.

One thing for the OP to consider, however, is that the passive indexing strategy most commonly espoused here is, in fact, a dividend strategy.  The S&P 500 index generates a 1.7% yield.  84% of the companies on the S&P 500 pay dividends.  Thus, following a passive indexing strategy over the long term will still result in an investment that provides an income stream.  After the portfolio reaches the desired size, it could be further tweaked to move into dividend-centric investments to enhance the income stream. 

Another consideration is that blind pursuit of dividend yield alone is a flawed strategy.  The stocks that produce the highest dividends tend to have one of two characteristics: 1) the stock price has plummeted due to fundamental problems with the company (low stock price + unchanged dividend = high dividend yield); 2) the stock is in an industry that has a history of high dividend yields (such as utilities, tobacco, or oil).  That second issue may leave you overly concentrated in specific sectors -- not a good move for long-term growth (no diversification if, say, the price of oil drops unexpectedly.)

In terms of comparing your strategy against a passive indexing strategy, use your current portfolio performance and compare it against the performance of Vanguard LifeStrategy Growth (VASGX).  There's no need to actually buy two dual portfolios for the comparison.  This would let you compare over longer timeframes as well, depending on how long ago you started your portfolio.

This is a very informative post.

So therefore, could one conclude that seeking a MORE dividend-focused approach within an index like the S&P 500 (ex: SDY) is akin to tilting?

Or one could say, "In order for me to stay sane and not screw up my entire portfolio, I'll keep 80 to 90% in SPY, and purchase 5 dividend paying stocks with the other 10-20%." Sure this person may (some here will say "WILL") underperform with that 10-20%, but they will keep the majority of their portfolio in fine shape -- with a controllable downside.

I am simply responding to the notion of a VERSUS here as well....perhaps replacing it with an AND.

ChrisLansing

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Re: Dividend Portfolio vs. Index Fund
« Reply #16 on: February 14, 2015, 06:35:43 PM »
My goal is to accumulate enough dividend and rental income to fund our lifestyle, my kids' when We are gone, and so on without having to sell assets. At an average 5% yield, that is not a problem. With a mutual fund at less than 2%, that goal isn't going to happen...I will have to sell assets.

I'm with Skyrefuge on this one.  The statement above shows a superficial understanding of the stock market.  If you're expecting a 5% yield, it doesn't matter if it's through dividends, or by selling assets.  You will never run out of either.  Dividends are mathematically equivalent to selling stock.

I'm new to investing (which is why for now I'm in Index funds) and I'm trying to understand basics.     Wouldn't selling stock (and then presumably buying stock to replace it - assuming you want to reinvest the principal) involve fees that dividend reinvestment does not?   Wouldn't dividend reinvestment then be slightly better mathematically?     Of course there comes a day when you have either to sell some shares, or take your dividends, if you want some money to live on.   

Wolf359

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Re: Dividend Portfolio vs. Index Fund
« Reply #17 on: February 14, 2015, 07:09:44 PM »

I'm new to investing (which is why for now I'm in Index funds) and I'm trying to understand basics.     Wouldn't selling stock (and then presumably buying stock to replace it - assuming you want to reinvest the principal) involve fees that dividend reinvestment does not?   Wouldn't dividend reinvestment then be slightly better mathematically?     Of course there comes a day when you have either to sell some shares, or take your dividends, if you want some money to live on.

Index investing usually uses no-load mutual funds.  Vanguard funds are preferred by many here because of their extremely low expense ratios.  That translates into no fees or commissions for buying and selling.  Yes, if you use ETFs (the stock version of the mutual funds), there are commissions for buying and selling.  So stay with the mutual funds.

If you do your rebalancing in your tax sheltered accounts, then there are no income tax consequences, either. 

The idea of having to sell shares or take dividends when you need to live on them implies that you're retired at that point.  Your income is therefore lower, and your taxes are as well. 

Qualified dividends are taxed at a lower rate than other income.  Google "dividend tax rate 2015" for the full tax rates, but for example, if you're married filing jointly, you can make up to $74,500 and have a tax rate of 0% on dividends.  If your income is higher, the current tax rate is only 15%.

Wolf359

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Re: Dividend Portfolio vs. Index Fund
« Reply #18 on: February 14, 2015, 07:26:03 PM »

This is a very informative post.

So therefore, could one conclude that seeking a MORE dividend-focused approach within an index like the S&P 500 (ex: SDY) is akin to tilting?

Or one could say, "In order for me to stay sane and not screw up my entire portfolio, I'll keep 80 to 90% in SPY, and purchase 5 dividend paying stocks with the other 10-20%." Sure this person may (some here will say "WILL") underperform with that 10-20%, but they will keep the majority of their portfolio in fine shape -- with a controllable downside.

I am simply responding to the notion of a VERSUS here as well....perhaps replacing it with an AND.
[/quote]

That's exactly the reason why I suddenly know more about dividend strategies.  I've been researching this and other approaches with that idea in mind.  I want to be able to play with "mad money," and put a hard limit such that that mad money will not be allowed to exceed 10-20% (TBD) of the portfolio to allow me to screw up. 

Dividend strategies have proven very effective in the past.  In fact, they are very successful right now.  That's exactly the problem.  With interest rates so low, more people have started following dividend strategies.  As more money has gone into those stocks, their prices have gone up and their yields have gone down.  That makes them more overpriced historically.  And overpriced stocks will eventually underperform. 

What will the market do?  I have no idea.  Still researching.  Still learning.  But in the meantime, fully indexing. 

Another consideration --  make sure your main portfolio is fully funded at a level that will meet your goals FIRST.  The "mad money" is extra, beyond that plan, and must not impact your primary objectives.

Dodge

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Re: Dividend Portfolio vs. Index Fund
« Reply #19 on: February 14, 2015, 09:45:21 PM »
Dividend strategies have proven very effective in the past.  In fact, they are very successful right now.

Can you link me to a fund or ETF that has been successful at beating the market?  Every time I research this, I come up short.  When people talk about this, the Dividend Aristocrats commonly come up.  A list of companies which have increased their dividend every year, for the pat 25 years.  How could we go wrong?  They throw up a chart showing the Dividend Aristocrats handily beating the market, and proclaim victory for their strategy.  It's all Survivorship Bias.

http://www.bogleheads.org/wiki/Survivorship_bias

The charts simply show, "This group of stocks which have exhibited increasing returns every year for the past 25 years, have higher returns than the market as a whole."

That sounds like a reasonable statement to make.  How is that information actionable?  Shall I then invest money in the stocks which have performed well over the past 25 years, hoping they will continue to perform well in the next 25 years?  Alarm bells should start ringing on that one.

While these charts on past performance always look great, I have yet to see an actual real-time dividend-focused fund beat the market.  This seemed strange to me, if the charts look so great, why weren't any funds/ETFs able to capitalize on this?  So I dug deeper...

We know that of the original Dividend Aristocrats, only 7 still remain in the index.  We also know that only 30% of companies currently in the index, are still there after 10 years, with the average length for any one company being 6.5 years.  This might be why the returns look so good in hindsight, yet are difficult to achieve in real-time. 

The worst part is when people advocate for dividend stocks at a replacement for bonds.  After all, bond yield is so low lately, you're just leaving yield on the table by choosing bonds over dividend stocks right?  During the 2008 great recession, the Dividend Aristocrats fund (SDY), a fund which is comprised of the 50 highest dividend yielding constituents of the stocks of the S&P Composite 1500 Index, that have increased dividends every year for at least 25 consecutive years, had lower returns than 100% bonds, and higher risk (volatility) than 100% stocks.  Let's see what that looks like graphed:



Of course, SDY only has about a 2% yield, that's barely better than bonds!  Let's see how the Preferred Stock Index Fund (PFF), a high yield fund which tracks 220 preferred stocks from 44 U.S. companies and yields a yearly dividend in the 7% range handled the 2008 recession:



Again, lower returns than 100% bonds (still hasn't caught up), and higher risk (volatility) than 100% stocks.  Imagine looking at your portfolio at this point in the crash, vs 100% stocks, and 100% bonds.  Imagine you're sitting pretty with $900,000 in your 100% dividend stock portfolio.  You're counting down the days till you're fire (under a year now!), then this happens:



Next thing you know you've lost your job and only have $300,000 left in your account.  I won't say "this is a very real possibility", I don't need to.  It has already happened, and it can happen again.

Maybe the real question is, how can you invest in Dividend Aristocrats, before they become Dividend Aristocrats?

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Re: Dividend Portfolio vs. Index Fund
« Reply #20 on: February 15, 2015, 09:05:13 AM »
That sounds like your problem, not his problem.  Many passive index investors have only a superficial understanding of the stock market as well.  I freely admit my own stock market is superficial and not very deep.  I am not in expert in stock picking.  That's why I'm following a passive index investing strategy.  It promises reasonable returns without me having to become an expert.  For that matter, much of the public at large has either a flawed or no understanding of the market at all (and are completely uninvested as a result.)  Who cares if dividend-focused investors don't "get it?" 

If a given strategy works, it is irrelevant how knowledgeable or flawed the investor's knowledge was.

Say there is a jungle chasm with a footbridge crossing it, and a tightrope. The dividend-focused investor is often standing one foot out on the tightrope, and more critically, is advertising that other people should join him, rather than taking the index footbridge. Yes, it is certainly possible to get across the chasm without knowing anything about rope-making, tensile strength, or suspension-bridge technology. But crossing on the footbridge only requires you to be able to walk. Crossing on the tightrope requires a deep knowledge of walking that only a few people actually possess. But because of their ignorance, the dividend-focused investors think the tightrope is just as safe a crossing as the footbridge. Maybe it is, if you actually have the knowledge of a tightrope walker, but unless you do, you should just take the footbridge.

YoungInvestor

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Re: Dividend Portfolio vs. Index Fund
« Reply #21 on: February 15, 2015, 09:14:32 AM »

Dividend strategies have proven very effective in the past.  In fact, they are very successful right now.  That's exactly the problem.  With interest rates so low, more people have started following dividend strategies.  As more money has gone into those stocks, their prices have gone up and their yields have gone down.  That makes them more overpriced historically.  And overpriced stocks will eventually underperform. 

What will the market do?  I have no idea.  Still researching.  Still learning.  But in the meantime, fully indexing. 


Right now, on the whole, the blue chip stocks I'm looking at (which almost all have a dividend) seem to be cheaper than many alternative investments. I'm seeing some attractive stocks with a P/E at 10-12 with some growth, giving me a 7-8% pessimistic (No growth/long-term) rate of return when I factor in some room for underperformance.

Otherwise, there are some (very-)small-caps with P/Es < 10,some growth and clean balance sheets, but I'm having a hard time assessing risk on them. In the middle, I'm having a hard time finding anything with a better risk/reward proposition than blue chips.


SaintM

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Re: Dividend Portfolio vs. Index Fund
« Reply #22 on: February 15, 2015, 03:00:02 PM »
How does one post a picture in a message?  When I push the "Insert Image" icon I just get some img gibberish.  If I click the "toggle view" button it prompts me for a webpage.  I want to use the picture on my desktop.

Indexer

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Re: Dividend Portfolio vs. Index Fund
« Reply #23 on: February 15, 2015, 03:06:23 PM »

Index investing usually uses no-load mutual funds.  Vanguard funds are preferred by many here because of their extremely low expense ratios.  That translates into no fees or commissions for buying and selling.  Yes, if you use ETFs (the stock version of the mutual funds), there are commissions for buying and selling.  So stay with the mutual funds.


Vanguard ETFs are commission free through Vanguard.  They are ETFs so there might be a spread, but in my experience buying VTI and VXUS its normally a few pennies. 

Dodge

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Re: Dividend Portfolio vs. Index Fund
« Reply #24 on: February 15, 2015, 09:01:58 PM »
How does one post a picture in a message?  When I push the "Insert Image" icon I just get some img gibberish.  If I click the "toggle view" button it prompts me for a webpage.  I want to use the picture on my desktop.

Go to http://imgur.com, click "Upload", upload the photo, and get the [ img ].......[ /img ] link on the right.  Copy and paste that link (including the [ img ] parts) into your post here.

skyrefuge

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Re: Dividend Portfolio vs. Index Fund
« Reply #25 on: February 16, 2015, 07:26:12 PM »
Or one could say, "In order for me to stay sane and not screw up my entire portfolio, I'll keep 80 to 90% in SPY, and purchase 5 dividend paying stocks with the other 10-20%." Sure this person may (some here will say "WILL") underperform with that 10-20%, but they will keep the majority of their portfolio in fine shape -- with a controllable downside.

I am simply responding to the notion of a VERSUS here as well....perhaps replacing it with an AND.

Sure, though dividend-focused investing generally seems to be pitched as an all-or-nothing thing (which is probably why the OP sees it as a "VERSUS" thing). I feel like a good bit of the attraction to dividend-focused investing is the idea of "outsmarting" both day-trader types and index investors, so pairing it with indexing goes against that image.

The combined ideas of using your smarts to select your own portfolio (of stocks too "boring" for the rest of those hot-shots in the market), and then not having to pay for ongoing mutual fund expenses, are two big components of dividend-focused investing that keeps it conceptually separated from mutual funds, and thus, indexing. As we've noted, it's not actually the lack-of-dividends that keeps the dividend-focused investor away from indexing.

I think more-informed investors who make a similar "tilt" in their index portfolios do so towards value-oriented stocks. In practice, they might end up with the exact same stocks as someone making a tilt toward dividend stocks, but they're more-correctly investing based on the market- and earnings-characteristics of the companies rather than screening simply on the method management chooses to use to return those earnings to shareholders.
« Last Edit: February 16, 2015, 07:28:10 PM by skyrefuge »

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Re: Dividend Portfolio vs. Index Fund
« Reply #26 on: February 16, 2015, 07:41:05 PM »
Wouldn't selling stock (and then presumably buying stock to replace it - assuming you want to reinvest the principal) involve fees that dividend reinvestment does not?

First, selling stock and then reinvesting it is not something anyone would ever do (except for fancy tax-optimization). If you don't need the money, you just hang onto your stocks. You only sell when you're going to spend that money to support your lifestyle.

Second, even at the point where you need the money, the transaction costs are zero, if you're using sensible mutual funds from a sensible provider.

Now, you've actually touched on an interesting thing here. Once upon a time, decades ago, transaction costs were not low/zero like they are today. Thus, at one time, dividends were a more-efficient way to produce income from your portfolio, and combined with relatively-high dividend rates, this led our grandfathers to have an actually-rational preference for dividend stocks in their retirement (though of course a dividend-focus was still sub-optimal in the accumulation stage).

That's no longer the case in today's investing world, but I believe that history is one reason that dividend-focused strategies continue to exist: it's a cultural holdover ("my grandpa told me he supported his whole retirement on dividend stocks!") that has enough critical-mass to keep it propagating into an era where its logic no longer applies.

brooklynguy

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Re: Dividend Portfolio vs. Index Fund
« Reply #27 on: February 16, 2015, 08:27:07 PM »
That's no longer the case in today's investing world, but I believe that history is one reason that dividend-focused strategies continue to exist: it's a cultural holdover ("my grandpa told me he supported his whole retirement on dividend stocks!") that has enough critical-mass to keep it propagating into an era where its logic no longer applies.

Dividend-focused strategies:  the human appendix of investing.

johnny847

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Re: Dividend Portfolio vs. Index Fund
« Reply #28 on: February 16, 2015, 08:40:28 PM »
That's no longer the case in today's investing world, but I believe that history is one reason that dividend-focused strategies continue to exist: it's a cultural holdover ("my grandpa told me he supported his whole retirement on dividend stocks!") that has enough critical-mass to keep it propagating into an era where its logic no longer applies.

Dividend-focused strategies:  the human appendix of investing.
Hahahhaha. Nice one!

Le Barbu

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Re: Dividend Portfolio vs. Index Fund
« Reply #29 on: February 17, 2015, 06:31:58 AM »
I'm still wondering where does this thread is suppose to lead OP, what will happen by the end of it (when MMM will no longer run this blog)?

Scandium

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Re: Dividend Portfolio vs. Index Fund
« Reply #30 on: February 17, 2015, 12:03:24 PM »
Dividend strategies have proven very effective in the past.  In fact, they are very successful right now.


Maybe the real question is, how can you invest in Dividend Aristocrats, before they become Dividend Aristocrats?

It would be interesting if someone (i.e. someone other than me..) did an analysis of how one would perform if one bought a number, or all, of what was the Dividend Aristocrats 25 years ago and held them until now. Or what if you sold any time one of them cut their dividend? That should be similar to a Dividend Aristocrats fund, is there one that goes back 25 years?

Dividend Growth Investor

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Re: Dividend Portfolio vs. Index Fund
« Reply #31 on: February 20, 2015, 10:24:26 AM »
I don't question dividend-focused investors because I think that dividend-paying stocks are poor investments. I question dividend-focused investors because their focus on dividends is often an indicator that they have only a superficial understanding of the stock market, and that could have negative consequences on their long-term investing success.

And this post does not help to alter that impression.

It really makes no sense to set a "dividend portfolio" against an "index fund", because those two things are not opposing strategies. Index funds are dividend portfolios. Here are two comparisons that would be more-correctly symmetrical in their opposition:

1) An active stock-picking strategy vs. passive buy-and-hold indexing.
2) A dividend portfolio vs. a non-dividend portfolio.

#1 you're already doing, since you don't have to actually buy the index side of things; you can just track that from public data. Investing exclusively in dividend-paying stocks can be part of an active strategy, but that doesn't mean dividends are a relevant factor in the competition (again, my whole crusade against a dividend-focus is based on this fact). That's because the index has no idea that it's supposed to care either way about dividends. (unless you choose a dividend-focused index fund, so I guess a subset (1a) could be "active dividend stock-picking vs. passive buy-and-hold dividend indexing")

#2 would have nothing to do with indexing, since there is no such thing as an anti-dividend mutual fund. So that would just be a comparison of two different stock-picking strategies, and since I've never seen anyone advocate for an anti-dividend stock-picking strategy, that test would answer a question no one even asked.

That said, if this "competition" is just a way for you to ease into index investing without having 5-years-ago-you call you a pussy and a sellout*, then go with Vanguard's Total Market Index, VTSAX. Approximately 50% of the ~3800 stocks it holds currently pay dividends. But it's even more dividend-heavy than that, since 84% of the 500 biggest companies (which dominate the index) currently pay dividends. Hopefully that helps you see the false equivalence you're setting up here?

* And no, no one is actually going to call you a pussy or sellout. Changing beliefs upon new information is actually super-admirable.

** But now I am reminded of an unintentionally hilarious post from Dividend Growth Investor where he hems and haws over whether he should keep some non-dividend paying stocks that fell in his lap. "But I'm a dividend investor! I have a blog that I foolhardily tied to a particular investing strategy, so I'm locked in! What would my readers think?!" (obviously I maliciously paraphrase!) In the end, he decided to hang on to them, saying entirely sensibly (and this time quoted verbatim) "The more important thing is for those companies to be able to grow earnings per share. In addition, it is possible that they pay a dividend at some point in the future." Holy shit, that's exactly what I would say! Normally I would give him huge props for that realization, except that it doesn't seem like it's fully sunk in yet, and, really dude, that's your stock-picking strategy? I had at least been giving these stock-pickers the benefit of the doubt on their picking strategy, but "oops, what's this stock that someone threw at me? Hmm, looks ok I guess, sure, I'll keep it" ain't no strategy!

It is very funny that my decision to hold on to CDK and HYH after the spin-off paid off better than it did for your S&P 500 index fund. Your index fund had to sell at much lower prices than we have today, and it did it automatically without any analysis. This shortcoming has cost investors money in the past, and has been well known for 20+ years (Source: Seth Klarman) So yes, my analysis of pros and cons, looking at history, and understanding that index funds selling no matter what did prove to be fruitful. It is ironic that of all the articles I have written, you chose to mock me for the one that actually shows the inefficiencies that index funds create. Your index fund costed you a lot of money with its selling of spin-offs (which of course is not calculated anywhere), and of course costed you a lot in taxes paid on gains realized. So it is funny you chose exactly the article that shows the side of index funds that shows their fallibility. Yet, I am the "bad one".

And if you had bothered to read my site, you would know how I do everything about dividend growth investing. You would also know what dividend growth investing is.  This is the strategy I follow for most of my money, and I have achieved my goals and objectives. Dividend growth investing works for everyone who is willing to do the work, and has worked very well for me - I have managed to do better than S&P 500 since I started.  I have written hundreds of articles on the topic, and analyzed a lot of companies over the years. If you are just realizing that I use earnings per share, and that I see it as an important fuel for future growth in dividends, then you probably need to do more research before you make any comments. The fact that you are forming opinions and shitting on peoples hard work proves to me that you are another useless internet troll, whose only goal is to confuse and anger, but not to add anything meaningful of value.

And by the way, unlike others which you follow without any thought, I have never peddled products that don't add any value to investors but charge them annual fees. Yes, I am talking about Betterment, which is useful only to its creators and for the "famous bloggers" who receive affiliate fees by telling their subscribers about it.

PS Dividend Growth Investing works. You can never prove that it doesn't work.

« Last Edit: March 19, 2017, 12:11:03 PM by Dividend Growth Investor »

Eric

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Re: Dividend Portfolio vs. Index Fund
« Reply #32 on: February 20, 2015, 11:20:23 AM »
I always figured I was never angry enough to pursue a dividend strategy.  Apparently I was correct in that assumption.

RapmasterD

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Re: Dividend Portfolio vs. Index Fund
« Reply #33 on: February 20, 2015, 12:50:50 PM »
People like you disgust me....ALL of you. Now go out there and get a job, tuck in your shirt, stop farting in public. Show some respect goddammit. [insert phlegmatic and gasping for breath cough attack sound effect here].

Neustache

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Re: Dividend Portfolio vs. Index Fund
« Reply #34 on: February 20, 2015, 01:57:01 PM »
For the most part, this thread was super helpful for me.  I've always thought of it as an either/or for some reason, and then was surprised when I finally investigated our Roth mutual fund to see we get dividend payments (automatically reinvested).  Got the Roth IRA years ago while listening to Dave Ramsey. 

So just a question - say you have an index fund, that of course has dividend stocks in it - would you (or can you even?) take the dividend payments first to take advantage of the tax break...then sell additional shares of the fund if you need more money?  Not even certain this question makes sense.  Basically, my strategy will be a semi-retirement plus rental income, and then if I need to pull from our index funds, I will.  So would the order of income be side hustles, rentals, dividends, then if needed sell off stocks, or is that even an option or does it even matter?

The tax implications of everything is what currently throws me for a loop.  So much to learn! Gah!

Sorry if the question is dumb - and yes, there is such a thing as a dumb question.  Ha!

sirdoug007

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Re: Dividend Portfolio vs. Index Fund
« Reply #35 on: February 20, 2015, 02:20:57 PM »

It is very funny that my decision to hold on to CDK and HYH after the spin-off paid off better than it did for your S&P 500 index fund. Your index fund had to sell at much lower prices than we have today, and it did it automatically without any analysis. This shortcoming has cost investors money in the past, and has been well known for 20+ years (Source: Seth Klarman) So yes, my analysis of pros and cons, looking at history, and understanding that index funds selling no matter what did prove to be fruitful. It is ironic that of all the articles I have written, you chose to mock me for the one that actually shows the inefficiencies that index funds create. Your index fund costed you a lot of money with its selling of spin-offs (which of course is not calculated anywhere), and of course costed you a lot in taxes paid on gains realized. So it is funny you chose exactly the article that shows the side of index funds that shows their fallibility. Yet, I am the "bad one".

What is the point you are trying to make about CDK and HYH?  I don't get it.  Those two companies have a market cap of less than $10 billion.  The S&P500 has a total market cap of over $19,500 billion (as of 11/2014) and is weighted by market cap.  So these two are less than 0.05% of the S&P500.  How does anything related to those companies move the needle at all?
« Last Edit: February 20, 2015, 02:23:51 PM by sirdoug007 »

skyrefuge

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Re: Dividend Portfolio vs. Index Fund
« Reply #36 on: February 20, 2015, 02:29:37 PM »
It is very funny that my decision to hold on to CDK and HYH after the spin-off paid off better than it did for your S&P 500 index fund.

My entire post was about an investor's underlying knowledge of the systems, not about performance (the very first line I wrote summarized that key point!), so I'm not sure why the first thing you mention is performance? I don't doubt that a buy-and-hold dividend-focused investor who understands where dividends come from will perform roughly the same as dividend-agnostic investor. That said, you're crowing about a 4 month period where one stock (CDK) significantly outperformed the S&P 500, and the other (HYH) matched the S&P 500 (with significant underperformance for much of the term); that's not quite the point where I'd be skating around with the Stanley Cup hoisted over my head if "my" stocks were in the lead.

Your index fund had to sell at much lower prices than we have today, and it did it automatically without any analysis.

Er, no it didn't. The index fund I recommended, VTSAX, is a total stock market fund. As long as the spinoff remains a US exchange-traded stock, it stays in the fund. Maybe you're thinking of something like an S&P 500 index fund? Those funds are essentially obsolete historical artifacts, and no one has suggested such a fund. Not that holding such a fund is bad choice, because every spinoff that gets sold out of a large-cap-only index fund at a "low price" gets bought by a less-large-cap index fund at the same "low price", so it's difficult to see how index investors lose out on the whole.

This shortcoming has cost investors money in the past, and has been well known for 20+ years (Source: Seth Klarman) So yes, my analysis of pros and cons, looking at history, and understanding that index funds selling no matter what did prove to be fruitful. It is ironic that of all the articles I have written, you chose to mock me for the one that actually shows the inefficiencies that index funds create. Your index fund costed you a lot of money with its selling of spin-offs (which of course is not calculated anywhere), and of course costed you a lot in taxes paid on gains realized. So it is funny you chose exactly the article that shows the side of index funds that shows their fallibility. Yet, I am the "bad one".

So what are you claiming, that spinoffs always go up in value relative to the index? How else does an index fund selling them cost me a lot of money? Even if we're talking about an S&P500 fund, in the case of HYH, there is only about 1 month in its 4 month existence where the fund would have been worth more if it held on to HYH. In the other three months, it would have been better off if it had sold immediately.

In terms of taxes, Vanguard's S&P 500 fund hasn't distributed any capital gains in this century. I guess if selling the spinoff always results in a gain rather than a loss (I have no idea how capital gains are calculated on spinoffs), then this theoretically reduces the fund's available losses that can be balanced against future gains, but I'd probably be dead before that became an issue for me.

And again, all of this probably-not-an-issue stuff turns into definitely-not-an-issue if you just use a total market fund, which is what MMM and everyone else has been recommending for years. Someone should probably tell Seth Klarman.

If you are just realizing that I use earnings per share, and that I see it as an important fuel for future growth in dividends, then you probably need to do more research before you make any comments.

No, I had already assumed you use earnings in your stock analysis; how did my post make you think this was news to me? (hopefully your reading comprehension of company reports is better than it is of Internet troll postings!) What was news to me was that you said earnings are a "more important thing" when choosing to own a stock. Though you didn't state it explicitly, I used the context to presume that you meant "earnings are a more important thing than dividends" when choosing a stock, and that's what I agreed with.

If that's what you were saying (and please correct me if I'm wrong) then I don't understand why you continue to use dividend payment (just one of the several options a corporation has for sharing earnings with its owners) as your primary screen. Wouldn't it make more sense to use a "more important thing", like earnings, and put a less-important thing like dividends further down the list (or not include them as a screen at all)?

It seems like you're so close to an epiphany here!

The fact that you are forming opinions and shitting on peoples hard work proves to me that you are another useless internet troll, whose only goal is to confuse and anger, but not to add anything meaningful of value.

Again, hopefully your company analysis is more astute than your human-being analysis!

And by the way, unlike others which you follow without any thought, I have never peddled products that don't add any value to investors but charge them annual fees. Yes, I am talking about Betterment, which is useful only to its creators and for the "famous bloggers" who receive affiliate fees by telling their subscribers about it.

Er, ok, I'm not sure what that has to do with anything. If it helps, your belief that I follow MMM without any thought is also wrong, since I agree with you that Betterment is a sub-optimal choice for most people. But, I do disagree with your belief that MMM is "peddling it" for the affiliate bonus; I think he just didn't analyze the fall-off in the Tax Loss Harvesting benefit as thoroughly as our faithful Dodge did.

PS Dividend Growth Investing works. You can never prove that it doesn't work.

You should read the first line of this post, and then the first line of the one before that.

skyrefuge

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Re: Dividend Portfolio vs. Index Fund
« Reply #37 on: February 20, 2015, 02:58:30 PM »
For the most part, this thread was super helpful for me.

Impossible! This thread is solely about trolling and angering! ;-)

So just a question - say you have an index fund, that of course has dividend stocks in it - would you (or can you even?) take the dividend payments first to take advantage of the tax break...then sell additional shares of the fund if you need more money?

Yes, except for the "tax break" bit. When turning investments into a retirement cash flow, the general strategy is to first take whatever dividends they throw off each quarter. If you need more money than that, then you sell an amount of your funds equivalent to your additional cash needs. If you need less money than is thrown off by dividends (there have been plenty of times when the US stock market's dividend yield has exceeded the Safe Withdrawal Rate), then you should reinvest those "extra" dividends.*

In terms of a "tax break", there is no tax break for dividends. Under current US law, you'll pay the same tax rate on your dividends as you do on your capital gains. However, 100% of your income from dividends will be taxable at that rate, whereas only part (or even none) of the money you get from selling funds may be taxable capital gains.

* this historical variation in dividend yields is yet another reason why "living off the dividends" is a suboptimal strategy; a lower-than-SWR dividend yield (like today's ~2%) means that you'll work an unnecessarily-long career to make your stash twice as large as it needs to be, while a higher-than-SWR dividend yield (like 1980's ~5%) risks your portfolio survival if you actually spend all those dividends.

Financial.Velociraptor

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Re: Dividend Portfolio vs. Index Fund
« Reply #38 on: February 20, 2015, 03:28:44 PM »
I am amused by this hypothetical "understanding how the market works."  I did an AAS in Accounting, a BBA in Economics, and an MBA in Finance.  I have made my living exclusively through income centric investments and trading for over two years.  Do *I* "understand" the market?  Hardly.  Unless you mean I 'understand' it is hyperactive two year old with severe narcissism and parents that refuse to provide discipline.  I mean, did anyone else notice today the markets were up almost a full percent on news that Europe has agreed to spend another 4 more not dealing with their fundamental problems?  Hurray@ [buy Amalgamated!!!]

Look, we can more or less "understand" accounting.  We can "understand" the [present value of] money.  We can "understand" the Efficient Market Hypothesis.  We cannot "understand" this ephemeral thing called The Market.  It is composed of millions of participants who (if we believe the academic studies) are just as likely to be emotional as in charge of their own intellect.  You think because some piece of software [cfirethingy] says you have x% chance of success you can count on the market to follow more or less historical behavior?  How many times have you seen the disclaimer "past performance is no guarantee [blah-blah-blah]?" 

DGI has demonstrated he knows where earnings come from (I am less convinced he has an in depth understanding of how the 'cash flow statement' works.)  Earnings ([sic - cash flow]) is where dividends come from.  That understanding puts him (her?) about a mile ahead of a lot of index investors.  Will it result in alpha?  Pfft.  Ask someone to read the Tarot cards for you, brother.

Point: passive index investing is not necessarily superior to any other disciplined approach to buying and holding.

skyrefuge

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Re: Dividend Portfolio vs. Index Fund
« Reply #39 on: February 20, 2015, 03:59:21 PM »
We cannot "understand" this ephemeral thing called The Market.

Sorry, I apparently have been insufficiently-specific in this thread. The particular "understanding" I'm talking about is not so broad and unexplainable as the behavior of the Market's millions of participants. It is simply this:

Do you understand that a dividend payment is functionally equivalent to the shareholder selling an equivalent amount of stock? And thus, a dividend payment on its own tells you nothing about a stock's future returns?

If so, then you are not a target of my loving browbeating. But there are many dividend-focused investors who became dividend-focused because they were ignorant of this simple mechanical truth, and think that dividends are some sort of "free money" that an equivalent non-dividend-paying company would not produce.

Financial.Velociraptor

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Re: Dividend Portfolio vs. Index Fund
« Reply #40 on: February 20, 2015, 04:46:44 PM »
Fair enough, skyrefuge.  There shall be no facepunching this evening.

It might be worthwhile to note the particular flavor of dividend investing espoused by DGI might be telling.  If you focus on companies that have a history of raising their dividends, you are very likely to provide yourself with a favorable selection bias towards companies with strong cash flows.  It is technically possible to increase dividends nearly forever by borrowing the cash (a thing called "recapitalization" was all the rage in the 80's), but I am not aware of any Dividend Aristocrats that are paying unsustainable cash in excess of operations.  PBI was the last in that category and it recently capitulated and slashed its distribution and dropped off the list when it was clear operations would no longer support cash out - selection bias, vindicated.

We can likewise say the same thing about traditional index investing.  The S&P 500 for example, is a list of 500 winners.  Poor performers get routinely dropped from the index to be replaced by a stronger firm.  Thus you have a selection bias towards profitable companies.  This factor makes VOO and RSP and the like fairly attractive.

kyith

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Re: Dividend Portfolio vs. Index Fund
« Reply #41 on: February 20, 2015, 09:25:42 PM »
i came into this topic hoping to see some really value arguments but it turns out to be rather degenerated up to a certain point. If you look at it philosophically, owning a section of USA index funds is not being passive but timing the market consider the larger portion of the world consist vastly of bonds and some other tiny countries.

There is this argument about surviorship bias but the same can be said of an index like sp500 where the weak drops out. the folks that understands the dividend aristocrats they do trim it when there is a dividend cut (i don't agree with this but it is still a pruning sequence)

I felt when it comes to wealth de-accumulation the dividend centric ways help a fair bit in that it combats the sequence of return risk that plagues a fund that you have to sell units. you have less units to get back to the previous point before the drawdown. this is perhaps why there are merits in rental properties as well because the principal is able to work itself out.

but i think all these are mitigated by sound rebalancing even in wealth deaccumulation. that is a systemantic sell high buy low to keep the portfolio humming in retirement.

folks in other parts of the world might beg to differ there is complete efficiency in the markets, so it is less clear that a index fund wins out.

RapmasterD

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Re: Dividend Portfolio vs. Index Fund
« Reply #42 on: February 21, 2015, 05:03:11 PM »
I am amused by this hypothetical "understanding how the market works."  I did an AAS in Accounting, a BBA in Economics, and an MBA in Finance.  I have made my living exclusively through income centric investments and trading for over two years.  Do *I* "understand" the market?  Hardly.  Unless you mean I 'understand' it is hyperactive two year old with severe narcissism and parents that refuse to provide discipline.  I mean, did anyone else notice today the markets were up almost a full percent on news that Europe has agreed to spend another 4 more not dealing with their fundamental problems?  Hurray@ [buy Amalgamated!!!]

Look, we can more or less "understand" accounting.  We can "understand" the [present value of] money.  We can "understand" the Efficient Market Hypothesis.  We cannot "understand" this ephemeral thing called The Market.  It is composed of millions of participants who (if we believe the academic studies) are just as likely to be emotional as in charge of their own intellect.  You think because some piece of software [cfirethingy] says you have x% chance of success you can count on the market to follow more or less historical behavior?  How many times have you seen the disclaimer "past performance is no guarantee [blah-blah-blah]?" 

DGI has demonstrated he knows where earnings come from (I am less convinced he has an in depth understanding of how the 'cash flow statement' works.)  Earnings ([sic - cash flow]) is where dividends come from.  That understanding puts him (her?) about a mile ahead of a lot of index investors.  Will it result in alpha?  Pfft.  Ask someone to read the Tarot cards for you, brother.

Point: passive index investing is not necessarily superior to any other disciplined approach to buying and holding.

+ 1, provided one really pays attention to the nuances of this text.

Dividend Growth Investor

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Re: Dividend Portfolio vs. Index Fund
« Reply #43 on: March 23, 2015, 08:57:51 AM »
It is very funny that my decision to hold on to CDK and HYH after the spin-off paid off better than it did for your S&P 500 index fund.

My entire post was about an investor's underlying knowledge of the systems, not about performance (the very first line I wrote summarized that key point!), so I'm not sure why the first thing you mention is performance? I don't doubt that a buy-and-hold dividend-focused investor who understands where dividends come from will perform roughly the same as dividend-agnostic investor. That said, you're crowing about a 4 month period where one stock (CDK) significantly outperformed the S&P 500, and the other (HYH) matched the S&P 500 (with significant underperformance for much of the term); that's not quite the point where I'd be skating around with the Stanley Cup hoisted over my head if "my" stocks were in the lead.

Your index fund had to sell at much lower prices than we have today, and it did it automatically without any analysis.

Er, no it didn't. The index fund I recommended, VTSAX, is a total stock market fund. As long as the spinoff remains a US exchange-traded stock, it stays in the fund. Maybe you're thinking of something like an S&P 500 index fund? Those funds are essentially obsolete historical artifacts, and no one has suggested such a fund. Not that holding such a fund is bad choice, because every spinoff that gets sold out of a large-cap-only index fund at a "low price" gets bought by a less-large-cap index fund at the same "low price", so it's difficult to see how index investors lose out on the whole.

This shortcoming has cost investors money in the past, and has been well known for 20+ years (Source: Seth Klarman) So yes, my analysis of pros and cons, looking at history, and understanding that index funds selling no matter what did prove to be fruitful. It is ironic that of all the articles I have written, you chose to mock me for the one that actually shows the inefficiencies that index funds create. Your index fund costed you a lot of money with its selling of spin-offs (which of course is not calculated anywhere), and of course costed you a lot in taxes paid on gains realized. So it is funny you chose exactly the article that shows the side of index funds that shows their fallibility. Yet, I am the "bad one".

So what are you claiming, that spinoffs always go up in value relative to the index? How else does an index fund selling them cost me a lot of money? Even if we're talking about an S&P500 fund, in the case of HYH, there is only about 1 month in its 4 month existence where the fund would have been worth more if it held on to HYH. In the other three months, it would have been better off if it had sold immediately.

In terms of taxes, Vanguard's S&P 500 fund hasn't distributed any capital gains in this century. I guess if selling the spinoff always results in a gain rather than a loss (I have no idea how capital gains are calculated on spinoffs), then this theoretically reduces the fund's available losses that can be balanced against future gains, but I'd probably be dead before that became an issue for me.

And again, all of this probably-not-an-issue stuff turns into definitely-not-an-issue if you just use a total market fund, which is what MMM and everyone else has been recommending for years. Someone should probably tell Seth Klarman.

If you are just realizing that I use earnings per share, and that I see it as an important fuel for future growth in dividends, then you probably need to do more research before you make any comments.

No, I had already assumed you use earnings in your stock analysis; how did my post make you think this was news to me? (hopefully your reading comprehension of company reports is better than it is of Internet troll postings!) What was news to me was that you said earnings are a "more important thing" when choosing to own a stock. Though you didn't state it explicitly, I used the context to presume that you meant "earnings are a more important thing than dividends" when choosing a stock, and that's what I agreed with.

If that's what you were saying (and please correct me if I'm wrong) then I don't understand why you continue to use dividend payment (just one of the several options a corporation has for sharing earnings with its owners) as your primary screen. Wouldn't it make more sense to use a "more important thing", like earnings, and put a less-important thing like dividends further down the list (or not include them as a screen at all)?

It seems like you're so close to an epiphany here!

The fact that you are forming opinions and shitting on peoples hard work proves to me that you are another useless internet troll, whose only goal is to confuse and anger, but not to add anything meaningful of value.

Again, hopefully your company analysis is more astute than your human-being analysis!

And by the way, unlike others which you follow without any thought, I have never peddled products that don't add any value to investors but charge them annual fees. Yes, I am talking about Betterment, which is useful only to its creators and for the "famous bloggers" who receive affiliate fees by telling their subscribers about it.

Er, ok, I'm not sure what that has to do with anything. If it helps, your belief that I follow MMM without any thought is also wrong, since I agree with you that Betterment is a sub-optimal choice for most people. But, I do disagree with your belief that MMM is "peddling it" for the affiliate bonus; I think he just didn't analyze the fall-off in the Tax Loss Harvesting benefit as thoroughly as our faithful Dodge did.

PS Dividend Growth Investing works. You can never prove that it doesn't work.

You should read the first line of this post, and then the first line of the one before that.

Hi Sky,

I am scratching my head to find out why you used the example you used, as evidence that my strategy is not working. Here are the facts, as represented by numbers:

HYH was spun-off on October 31, 2014 when the closing price was $37.97/share. The price was $46.13/share on Feb 20 and $49.26/share on March 20. This equates to a return of 29.70%. The S&P 500 returned 4.90% over that same period.

CDK was spun-off on October 1, 2014. The closing price was $31/share. The price was $48/share on Feb 20 and $48.33/share on Mar 20. This equates to a return of 55.90%.  The S&P 500 returned 8.90% over that same period.

If me holding on to those stocks proves that my strategy is a failure, then I want more of it.

« Last Edit: March 19, 2017, 12:11:32 PM by Dividend Growth Investor »

ac

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Re: Dividend Portfolio vs. Index Fund
« Reply #44 on: March 23, 2015, 09:28:14 AM »
Total Stock Index.  (Vanguard of course)

Low cost = 0.05%
Its highly tax efficient.  You will pay taxes on dividends, but its highly unlikely to spit out capital gains until you sell it.
Right now you lack diversification.  The total stock index has over 3500 stocks. 


I would also add Total International stock index, but thats just me.

You could also get international equities by purchasing vanguard's total world etf (VT). 

I dont know of a good etf that includes zero dividends. 

691175002

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Re: Dividend Portfolio vs. Index Fund
« Reply #45 on: March 23, 2015, 10:34:21 AM »
I agree with Skyrefuge here.  In my experience, a huge number of people equate dividend yield with expected return going forward.  In retail there would frequently be investors who would simply purchase the highest yielding stock simply because they assumed the yield was their total return.  The truth is that dividend yield has no direct influence on the value of a company.  Share repurchases, for example, are functionally identical to dividend reinvestment.  Earnings that are not paid out by the company are reinvested, and assuming competent management will increase the share of earnings you are entitled to. 

Berkshire Hathaway has never paid a dividend, and Buffet uses the following justification:  If you want the company to give you your money back so badly, why did you invest in them in the first place?

Dividend stocks have historically had several factors working in their favor.  In the past, transaction costs were huge, and simply selling small portions of your portfolio was not practical - If you wanted income from your portfolio you needed dividends. 

Screening on dividends will also eliminate companies with negative earnings.  This fact can be used to construct misleading backtests against certain indices, but does not translate into outperformance against indices that are broadly profitable (as shown in previous posts).

I would personally attribute outperformance of dividend stocks to several factors they share.  Dividend paying companies are generally low-risk, cash generating businesses with a history of profitability.  I have no problem tilting a portfolio towards such companies, and dividends are certainly a lot easier to identify than a high quality balance sheet or good management.


Note that comparing two portfolios over a short time period proves absolutely nothing.  If you truly want to track down signs of outperformance by dividend stocks you would need to do a broad study of decades of historical data.  As you might imagine, this has been a fairly well explored academic topic and such data is available should you wish to pursue it.

Note that all tilted strategies have been the beneficiaries of recent marketing campaigns.  Active managers are trying to get into the passive game by tilting indices and charging 0.25%+ for it.
« Last Edit: March 23, 2015, 10:37:01 AM by 691175002 »

Dodge

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Re: Dividend Portfolio vs. Index Fund
« Reply #46 on: March 23, 2015, 10:56:36 AM »
There is this argument about surviorship bias but the same can be said of an index like sp500 where the weak drops out. the folks that understands the dividend aristocrats they do trim it when there is a dividend cut (i don't agree with this but it is still a pruning sequence)

The S&P500 returns do not exhibit survivorship bias, because when we're looking at a chart, we're looking at the live trading results of that index.  This is what survivorship bias looks like:







The charts with history going past 2005 are the most telling, since the Dividend Aristocrats Index was created in 2005!  This makes the survivorship bias quite clear.  These charts are not a representation of what our returns would look like had we followed the Dividend Aristocrats Index since 2005.  We know that of the original Dividend Aristocrats, only 7 still remain in the index.  We also know that only 30% of companies currently in the index, are still there after 10 years, with the average length for any one company being 6.5 years.  This index changes a lot, and these charts don't reflect this.  The charts are showing us what it would look like if we took today's Dividend Aristocrat list, and invested in those companies 25 years ago.  This would have been impossible to actually do 25 years ago, because the 1989 version of us can't know what companies will be on the list in 2015!

Here are the actual (non-survivorship bias) returns of the Dividend Aristocrats Index (SDY) vs the S&P500 and VTSAX since inception:


waltworks

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Re: Dividend Portfolio vs. Index Fund
« Reply #47 on: March 23, 2015, 11:24:36 AM »
It just proves that you got lucky with some individual stocks. If you can keep doing that going forward, awesome! But you probably can't, and in 20 years, you will probably have less money (and hair) than if you'd just dumped into VTSAX or some target date fund or something.

-W

Hi Sky,

I am scratching my head to find out why you used the example you used, as evidence that my strategy is not working. Here are the facts, as represented by numbers:

HYH was spun-off on October 31, 2014 when the closing price was $37.97/share. The price was $46.13/share on Feb 20 and $49.26/share on March 20. This equates to a return of 29.70%. The S&P 500 returned 4.90% over that same period.

CDK was spun-off on October 1, 2014. The closing price was $31/share. The price was $48/share on Feb 20 and $48.33/share on Mar 20. This equates to a return of 55.90%.  The S&P 500 returned 8.90% over that same period.

If me holding on to those stocks proves that my strategy is a failure, then I want more of it.

PS . I know comparing numbers, and looking at percentages can be intimidating.  But it deeply saddens me that American students like Sky are not taught how to do mathematics.

skyrefuge

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Re: Dividend Portfolio vs. Index Fund
« Reply #48 on: March 23, 2015, 03:31:51 PM »
HYH was spun-off on October 31, 2014 when the closing price was $37.97/share. The price was $46.13/share on Feb 20 and $49.26/share on March 20. This equates to a return of 29.70%. The S&P 500 returned 4.90% over that same period.

Oops, I simply looked at a Morningstar total-return chart which showed that HYH started trading on October 21. It somehow dropped 7.4% by October 31 (while the S&P500 rose 6%), so that's why its performance vs. S&P500 looks much worse than if you use the October 31st date as the real starting point.

Grrr, I'm so mad that you pointed out my error, showing me that a non-dividend-paying stock performed better than I initially thought! Hopefully not many people will notice, because, damn, if people realize that non-dividend-paying stocks can produce a good return and help achieve a secure retirement, who knows what will happen to our world?! So let's just keep this secret between you and me, ok?

uwp

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Re: Dividend Portfolio vs. Index Fund
« Reply #49 on: March 23, 2015, 03:32:38 PM »

Can you link me to a fund or ETF that has been successful at beating the market?  Every time I research this, I come up short.  When people talk about this, the Dividend Aristocrats commonly come up.  A list of companies which have increased their dividend every year, for the pat 25 years.  How could we go wrong?  They throw up a chart showing the Dividend Aristocrats handily beating the market, and proclaim victory for their strategy.  It's all Survivorship Bias.

http://www.bogleheads.org/wiki/Survivorship_bias

The charts simply show, "This group of stocks which have exhibited increasing returns every year for the past 25 years, have higher returns than the market as a whole."

That sounds like a reasonable statement to make.  How is that information actionable?  Shall I then invest money in the stocks which have performed well over the past 25 years, hoping they will continue to perform well in the next 25 years?  Alarm bells should start ringing on that one.

While these charts on past performance always look great, I have yet to see an actual real-time dividend-focused fund beat the market.  This seemed strange to me, if the charts look so great, why weren't any funds/ETFs able to capitalize on this?

I don't know what the OP is trying to accomplish, but I do hate to see a good dividend strategy maligned.
Since inception, SDY has beaten the S&P 500 with a lower standard deviation to boot.  Sounds pretty decent to me.
« Last Edit: March 23, 2015, 03:37:16 PM by uwp »