Author Topic: Fun discussion ETF investing vs Dividend investing  (Read 4387 times)

davef

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Fun discussion ETF investing vs Dividend investing
« on: December 14, 2023, 02:50:54 PM »
Hello MMM Community. I have been absent from this community for the past 5 years raising 3 little ones but I have been practicing what I learned here when I was a regular 5-8 years ago.

In June my grandfather died a few months short of his 103rd birthday. He was a WWII vet and Chemical Engineer. He retired in 1983 at the age of 63. In the late 1970s he began investing. In the 40 years from 1983 to 2023 he turned 25,000 to more than 6,000,000 in the stock market. Plus, he provided for himself and his wife for those 40 years without ever touching the principle. I bring this up for discussion because he used a very different strategy than ETF investing. And it's worth having the debate. Furthermore, I have grown a bit bitter as I feel the ETF investing strategy has enabled this ESG crap, which I despise.

His strategy was buying individual stocks of companies with solid dividends, reputable companies only, and usually only companies he did business with. He would hold on to a lot of bonds and everytime the market crashed he would buy all he could at pennies on the dollar, usually oil companies, pipline companies, or consumer staples, drug companies and occasionally consumer discretionary and banks. He also bought stock in companies his kids and grandkids worked at if they were happy with their employer that had him in Pepsi, At&t, Apple, Merck, Danaher, Union Pacific Lockheed Martin and Quanta Services early. He rarely sold stock unless he thought the company was headed for disaster.

Can anyone compare this rate of return with an Index fund over that 40 years?what are your thoughts?

Metalcat

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #1 on: December 14, 2023, 02:53:10 PM »
It really sucks that the search function here is so shit. Dividend investing was all the rage in finance articles a few years ago and we talked about it here endlessly.

The essential consensus was the main advantage is that it makes people feel good.


Radagast

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #3 on: December 14, 2023, 04:04:42 PM »
Depending on when in the late 70's, a $25,000 in the US stock market would have become ~$4,500,000. You can back test VFINX directly since it opened 08/31/1976. It sounds like he got similar to market returns, as there were other stock purchases made from bonds. 1982 was the all time record best year to have retired in or invested in the US, for both stocks and bonds.

I somehow hadn't realized where Wilsonville was but when I read the post I was like "it sounds like he's from Newberg." Man was that a good guess :D
« Last Edit: December 14, 2023, 04:07:41 PM by Radagast »

davef

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #4 on: December 14, 2023, 04:07:45 PM »
Haha,
Newburg was just around the corner! I moved to Florida last year but I loved my 12 years in Wilsonville.

Telecaster

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #5 on: December 14, 2023, 07:28:08 PM »
Your grandad had a CAGR of 14.6% as compared to the index which returned about 11% over the same period.   Which is quite impressive.

The scoop on dividends is they aren't tax efficient.  For that reason and others, dividends have been a decreasing amount of the total return of the stock market for a number of decades. 

 That said, I'm not sure what your grandad did would be what most people here would describe as a dividend strategy.   Sounds like he was a value investor who specialized in quality companies.   From the early 1980s to 2000s bonds had a great run as well, which may have helped boost his returns.   Picking individual stocks worked great for your grandad, but the vast majority of investors aren't very good at it, and are better off just buying the index.   

A few years ago, the broader market had been in the doldrums for a while, bonds were super expensive, and so dividend strategies became very popular.   The typical strategy was to find companies that always increased dividends, and then not worry about the share price.  The market has picked up in recent years so you don't hear much about that strategy anymore.   One problem with it is that companies with generous dividend yields tend to be fairly crappy that you don't really want to own.   


davef

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #6 on: December 15, 2023, 04:44:25 AM »
I agree,
He liked dividends, but he liked quality companies more. And he liked stable, well led companies with a PE ratio of less than 8. He never bought Yahoo, Facebook Amazon or Google because at PE ratios from 50 to 100 there are years of speculative earnings built into the price, sure, they may continue to go up, but in a crash those companies are going to get hit way harder than AT&T, Verizon, Drug companies, Exxon, Shell, BP, COP or KMI with a PR ratio of 5-8 and product that people still need to buy.

He would go on a buying frenzy when the market was down. When Covid hit, he bought oil companies at prices that equated to 8-10% dividends. Not only does he get those dividends on an ongoing basis but the prices doubled or tripled within a year.

Right now, I own about 500k in the various indices in my retirement accounts. But I decided to take the 165k in my brokerage account and try his strategy. I'll let you all know how it goes. I'll be happy if I match the market, but I hate the idea of my money being leveraged by these ESG stooges to strongarm companies into social policy I disagree with and is bad for my financial interest.

Scandium

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #7 on: December 18, 2023, 01:21:18 PM »
.. quality companies
... stable, well led companies...

I love phrases like these, which always seems to come in dividend discussions. They are absolutely meaningless and vapid. As if there's just some magical internal qualities certain companies possess, and others don't, and with this they'll do great independent of external factors. Of course if this was the case why wouldn't everyone just buy these and nothing else?! And of course companies only have these qualities, until they don't. And often you only know after the fact! If there's a huge business change, you can't tell if its "well-led" until it's already too late. And FWIW id argue both google and amazon are fairly 'stable, and well-led" as well. Apple even pays a dividend..

And from your lists seems to be about half oil companies? Two telco dinosaurs, and "drug companies". That's some pretty heavy bets on some very specific, and stale, sectors.
« Last Edit: December 18, 2023, 06:31:46 PM by Scandium »

erp

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #8 on: December 18, 2023, 03:17:18 PM »
It always strikes me as a bit weird that people differentiate so strongly between buying ETFs and buying a diverse collection of stock. An ETF is just a diverse collection of stock and as long as you're *actually* doing a good job of buying a diverse collection of stock at acceptable prices, it seems like the outcome would be similiarish. I think that a value investing philosophy seems like it should definitely work ... if you've put in the work.

Now, if you're stock picking and not coming up with a diverse collection, or if you're not buying and holding, or if you're heavily leveraged ... then you are extremely likely to see much worse returns than average.

It is true, as near as I can tell, that dividends can mess up your taxes a bit. It varies a lot by jurisdiction. On the other hand, if you're a real buy and hold investor then your MER is zero except for those taxes - so maybe you come out ahead?

I'd be a bit cautious about investing based on your moral philosophy (which is what you're doing if you invest in ESG funds, but also what you're doing if you systematically avoid companies who are optimizing for ESG). My favourite comment on this was from "Ministry for the Future" - one of the characters says something to the effect of "don't short humanity". I've taken this to mean "don't invest (or behave) in a way which bets on a world you don't want to live in" - even if you're correct in your investment thesis, you're stuck in a shitty world.

Maybe a question for you - if you think you can reliably identify stable, quality companies at fair prices, then great! If you're trying to optimize for buying shares of companies who match your moral philosophy that's also great! However, if you think that all of the stable, quality companies at fair prices also match your moral philosophy then I'd encourage you to re-examine whether you've got some confirmation bias going on.

(I index, because I'm lazy and happy to accept a good enough result - I'd rather focus on paying attention to the people I love and the communities I'm a part of. I suspect that someone who was willing to put in the work could make my money work better, but there's some small chance that they'd make it work much, much worse)

bacchi

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #9 on: December 19, 2023, 09:00:36 AM »
It always strikes me as a bit weird that people differentiate so strongly between buying ETFs and buying a diverse collection of stock. An ETF is just a diverse collection of stock and as long as you're *actually* doing a good job of buying a diverse collection of stock at acceptable prices, it seems like the outcome would be similiarish. I think that a value investing philosophy seems like it should definitely work ... if you've put in the work.

Fisher Investments tries to replicate an index more-or-less with their researched stock choices. With all of their algorithms and analysts, they still can't reliably beat the S&P.


erp

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #10 on: December 19, 2023, 09:33:30 AM »
It always strikes me as a bit weird that people differentiate so strongly between buying ETFs and buying a diverse collection of stock. An ETF is just a diverse collection of stock and as long as you're *actually* doing a good job of buying a diverse collection of stock at acceptable prices, it seems like the outcome would be similiarish. I think that a value investing philosophy seems like it should definitely work ... if you've put in the work.

Fisher Investments tries to replicate an index more-or-less with their researched stock choices. With all of their algorithms and analysts, they still can't reliably beat the S&P.


I think the question is 'if you didn't need to pay those analysts and coders who write algorithms, could you perform well at the 10+ year timescale'? I suspect the answer is yes. Essentially, I don't believe that active value investors are likely to beat the market after fees, but I don't find it implausible that they can (often) beat the market if fees are zero.

The OP is suggesting that they'd be a value investor doing their own research, holding assets directly and not paying any middle men or trading frequently. That's not especially different from holding an index, although you could plausibly end up trading even less frequently than you would if you index (because an index adjusts periodically, buying and selling to match the current market caps).

Now ... I suspect most people who try this will perform less well than an index, but that's not because the approach is fundamentally worse, it's because most people make worse decisions when they're not able to forget about their investments.

bacchi

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #11 on: December 19, 2023, 11:33:22 AM »
It always strikes me as a bit weird that people differentiate so strongly between buying ETFs and buying a diverse collection of stock. An ETF is just a diverse collection of stock and as long as you're *actually* doing a good job of buying a diverse collection of stock at acceptable prices, it seems like the outcome would be similiarish. I think that a value investing philosophy seems like it should definitely work ... if you've put in the work.

Fisher Investments tries to replicate an index more-or-less with their researched stock choices. With all of their algorithms and analysts, they still can't reliably beat the S&P.


I think the question is 'if you didn't need to pay those analysts and coders who write algorithms, could you perform well at the 10+ year timescale'? I suspect the answer is yes. Essentially, I don't believe that active value investors are likely to beat the market after fees, but I don't find it implausible that they can (often) beat the market if fees are zero.

The OP is suggesting that they'd be a value investor doing their own research, holding assets directly and not paying any middle men or trading frequently. That's not especially different from holding an index, although you could plausibly end up trading even less frequently than you would if you index (because an index adjusts periodically, buying and selling to match the current market caps).

Now ... I suspect most people who try this will perform less well than an index, but that's not because the approach is fundamentally worse, it's because most people make worse decisions when they're not able to forget about their investments.

Sure, theoretically, it can be done but, again, we're back to what company is a good purchase, long term. An index has the advantage of holding hundreds of companies. For every AIG, there's a Berkshire. For every GM, there's a Broadcom.

Imagine buying Ford in early 2013 because of its impressive performance from 2008-2012...and then watching it be a laggard for the next 10 years.

Must_ache

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #12 on: December 19, 2023, 01:27:34 PM »
.. quality companies
... stable, well led companies...

I love phrases like these, which always seems to come in dividend discussions. They are absolutely meaningless and vapid.

I like your comment.  One of Warren Buffet's favorite stocks is KO.  That's a quality/stable company, right?  But it has a P/E of 24 or so.  Five years ago you could buy it for $49.45.  Along the way you picked up $12.12 in dividends and sold it today for $58.71.  All in, you gained +7.45%/yr ... yawn...

Stimpy

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #13 on: December 20, 2023, 11:01:35 AM »
Compare 40 years of dividend stocks vs 40 years of indexes....  Why not just say SnP500 and be done with it...  Those are about as "reputable" and "stable" as your going to get, and many companies on there pay a dividend.  And if I had to guess, I'd guess your grandfather was invested in those same companies currently in the index....

I employ both Dividend investing and Indexing.   Do I beat the snp 500 every year... No.  Do I care.  No.  I beat or equal it enough at this point it doesn't matter to me.  And before you ask YES I also have years where I do worse.  Like I said it's close enough for me and keeps heading the same direction that it's not a matter of, did I beat it.  It's a matter of, am I still growing enough for that it will work for my retirement plan....  And the answer to that is Yes.

What your grandfather did, was and can still be just fine.  He indexed in his own way, and I suspect didn't trade often.  Which makes him a rare exception in the current world of individual stock investors.  Finding a "good" company and holding has and always will be a good way to make money.  (And yes "good" in this case is subjective.  No other way to put it.)   If your going to do that anyway, but don't want to do all the foot work.... Indexing is just as good.   Buy, and hold wins in both cases.  One is just a bit easier to deal with, as I know people here will state.
« Last Edit: December 20, 2023, 11:05:51 AM by Stimpy »

erp

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #14 on: December 20, 2023, 02:04:36 PM »
Compare 40 years of dividend stocks vs 40 years of indexes....  Why not just say SnP500 and be done with it...  Those are about as "reputable" and "stable" as your going to get, and many companies on there pay a dividend.  And if I had to guess, I'd guess your grandfather was invested in those same companies currently in the index....

I employ both Dividend investing and Indexing.   Do I beat the snp 500 every year... No.  Do I care.  No.  I beat or equal it enough at this point it doesn't matter to me.  And before you ask YES I also have years where I do worse.  Like I said it's close enough for me and keeps heading the same direction that it's not a matter of, did I beat it.  It's a matter of, am I still growing enough for that it will work for my retirement plan....  And the answer to that is Yes.

What your grandfather did, was and can still be just fine.  He indexed in his own way, and I suspect didn't trade often.  Which makes him a rare exception in the current world of individual stock investors.  Finding a "good" company and holding has and always will be a good way to make money.  (And yes "good" in this case is subjective.  No other way to put it.)   If your going to do that anyway, but don't want to do all the foot work.... Indexing is just as good.   Buy, and hold wins in both cases.  One is just a bit easier to deal with, as I know people here will state.

Thanks for articulating this @Stimpy - this is pretty much the point I was trying to make (albeit less articulately).

ChpBstrd

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #15 on: December 21, 2023, 08:02:18 AM »
One issue we don't often account for is that back in the 70's/80's it could cost hundreds of dollars in commission to buy or sell a lot of stocks or bonds. You had to talk to a broker, perhaps sign some documents, and the process took days. Mutual funds usually had high loads (fees to buy or sell) and high expense ratios, so the common wisdom at the time was to avoid these.
In the 40 years from 1983 to 2023 he turned 25,000 to more than 6,000,000 in the stock market.
His strategy was buying individual stocks of companies with solid dividends, reputable companies only, and usually only companies he did business with. He would hold on to a lot of bonds and everytime the market crashed he would buy all he could at pennies on the dollar, usually oil companies, pipline companies, or consumer staples, drug companies and occasionally consumer discretionary and banks. He also bought stock in companies his kids and grandkids worked at if they were happy with their employer that had him in Pepsi, At&t, Apple, Merck, Danaher, Union Pacific Lockheed Martin and Quanta Services early. He rarely sold stock unless he thought the company was headed for disaster.
So I'm thinking the above summarizes at least 40 trades. If each trade cost on average just $400 to consummate, that's another $16k spent in addition to the $25k initially invested (and with no additional deposits we presume?).

Whether the commissions and fees came from dividends or capital gains or other income, grandpa probably turned quite a bit more than $25k into those $6M. The story is technically true that he started with $25k and invested it into $6M, but we would be committing a couple of fallacies if we tried to compare that to the total return of the stock indices. It would be interesting if he had a complete set of documentation, to see exactly how things panned out.

It's still an impressive run. He picked at least most of the right stocks, at the absolute best time in history, and managed to *usually* practice a B&H strategy. Most of his generation had less luck with their strategies. Hopefully his heirs learned the B&H lesson and the frugality lesson instead of the stock picking lesson.

Telecaster

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #16 on: December 21, 2023, 01:25:55 PM »
The Dow is a curated list of 30 stocks which could be described as "quality" dividend paying companies.   The Dow tracks the S&P 500 pretty well, and even has had some long periods of outperformance, despite some nutty selection criteria.     So it is totally possible to do this kind of thing yourself.  But it is lot easier just to buy the index instead of creating your own.   

Brit71

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #17 on: February 06, 2024, 02:50:30 PM »
I'm a dividend investor who's thinking of jumping ship.

Firstly I'm in the UK (and my gains and income are fairly efficiently tax wrapped) so the tax advantages of capital gains don't really apply to me.

I'm also not that concerned about my disappointing medium term market performance.  As others have pointed out this has a lot of the symptoms of the end of a bull cycle.  One of those symptoms is growth companies return more.  We're factoring in over optimistic growth forecasts.  So I've underperformed compared to the index, but on the other hand I'm buying cheap-ish income, certainly compared to growth stocks.

My dividend stocks are also yielding around 5%.  If I retire when the income covers the expenses then this will be with a 20% smaller pot than an index fund.  I may not be able to retire on that for reasons given below, but it's still something to be borne in mind.

So a disadvantages of dividends are the complexity.  Reinvesting, which I have to do for US shares and index funds, is a pain as is investing sums that I put into my accounts.  If I have 1, 2 or 3 index funds it's just allocate the money to the fund.  There's no investment step before hand which means that they will get invested more quickly and with less stress overhead.  Also the complexity will go on in retirement.  This will be fine when I'm relatively young, but as I get older and let's face it my cognitive ability goes down, it may become a pain.  However collecting dividends when old is relatively easy, selling although still easy will still be more of a chore.  But on the whole index investing looks easier through the piece.

I also dislike the idea of choosing stocks. I've long ago made my peace with the idea of being worse than the market in choosing stocks.  And here I am choosing stocks - they are diversified at least.

The comparative flexibility of index funds is also quite compelling.  My younger wife is paying into a public sector pension, and is unlikely to want to keep working if I retire - in fact I could quite see the opposite.  So either I have to wait for her early retirement to kick in, which won't be early retirement for me, or we need to sell more shares at an early stage to pad out the time until her pension comes.  A dividend retirement strategy is fine with share sales late in your retirement, but it bombs out early in retirement.  So it's either cash or index funds.  However an index fund strategy deals with that in its stride.

Talking about a younger wife, she's very likely to outlive me.  And she doesn't pay much interest in investments and already has investments in an index.  The maintenance of a dividend strategy - even finding another home for money from a buy out - may be harder than an index strategy which just involves selling the right amount.

Looking through the dividend threads here there's one thing that I hadn't considered which is dividend cuts.  As retirement will probably be around the time that dividends cover expenditure then a dividend cut will be painful.  So that means having a slightly higher dividend stream than necessary to cover the expenses as across a diverse portfolio you have to expect companies to cut and restore.  If there is a downturn, as with Covid, then a number of companies will cut at once - then the margin of error is gone and you're selling shares in a downturn so magnifying losses.  This also happens with an index approach but they're also selling when the markets up and sideways.  I have been following an High Yield Portfolio approach (it's a rather British thing) and also following retirees on there and they don't seem to sweat these things or to sell shares, instead keeping a couple of years expenses in the bank and dip in as they need to and replenish when the fatter times return (and if fat times don't return BOTH approaches are in trouble).  Now this is fine, it's part of the allocation but it's extra cash compared to the 4% route.

But dividends still have a pull.  My investments are in order to have income in my non working years.  And companies who have a history of understanding that are more aligned to that purpose than those who are using the profits to buy overpriced emerging competitors or to invest breathtaking sums in unproven technologies.  Those companies are for the capital growth speculators, and I'm after income. 

I'm sure that there are many non dividend payers who will eventually mature into dividend payers, and others who will get bought out and release the profits that they aren't sharing with me; but on the other hand how many of these non dividend payers are squandering their profits.  Also dividends don't lie (well, lie less) as there has to be some cash on hand to pay these dividends.  The dividends could be borrowed in some way, but that doesn't last.  Growth stocks can lie, and towards the end of a bull market are punished if they don't lie.

There's one other psychological thing.  Growth only matters when you sell, dividends are in the bank.  Saying that you've grown 20% won't matter if it falls 30% tomorrow.  While these sharp reverses are much less likely on an index, they still can happen - and this can devastate you in the first couple of years in retirement.  The dividends can't be taken back.
« Last Edit: February 07, 2024, 01:01:40 PM by Brit71 »

Retire-Canada

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #18 on: February 09, 2024, 07:27:34 AM »
Saying that you've grown 20% won't matter if it falls 30% tomorrow.  While these sharp reverses are much less likely on an index, they still can happen - and this can devastate you in the first couple of years in retirement.  The dividends can't be taken back.

You need a plan to manage SORR [Sequence of Return Risks] whether you are a total return/index investor or a relying on dividends. You've already identified dividend cuts are a possibility.

I'd also note it works the other way as well...when your index portfolio is up 50%+ and you experience a 30% loss selling a few shares is not the end of the world. Depending on how your portfolio/WR plan is structured that may be the time you sell bonds instead of stocks.

Although I am a Total Return investor the portion of my FIRE budget that is covered by dividends has grown every year. It's already exceeding my minimum annual spend so if I really wanted to avoid selling shares I could with some adjustments to spending.

My GF has very little interest/knowledge around investing so we set her up with a 2 ETF/Index Fund portfolio which she can happily manage on her own at a self-serve brokerage. If she showed even less interest/attitude for the topic we'd have gone for a single all in one ETF/Index Portfolio Fund. Heck as you note aging and cognitive decline are real issues so we may do the latter with both our investment accounts at some point anyways. Then the choice will just be how much to sell and when.
« Last Edit: February 09, 2024, 07:31:56 AM by Retire-Canada »

Brit71

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #19 on: February 09, 2024, 08:02:44 AM »
Saying that you've grown 20% won't matter if it falls 30% tomorrow.  While these sharp reverses are much less likely on an index, they still can happen - and this can devastate you in the first couple of years in retirement.  The dividends can't be taken back.

You need a plan to manage SORR [Sequence of Return Risks] whether you are a total return/index investor or a relying on dividends. You've already identified dividend cuts are a possibility.

I'd also note it works the other way as well...when your index portfolio is up 50%+ and you experience a 30% loss selling a few shares is not the end of the world. Depending on how your portfolio/WR plan is structured that may be the time you sell bonds instead of stocks.

Although I am a Total Return investor the portion of my FIRE budget that is covered by dividends has grown every year. It's already exceeding my minimum annual spend so if I really wanted to avoid selling shares I could with some adjustments to spending.

My GF has very little interest/knowledge around investing so we set her up with a 2 ETF/Index Fund portfolio which she can happily manage on her own at a self-serve brokerage. If she showed even less interest/attitude for the topic we'd have gone for a single all in one ETF/Index Portfolio Fund. Heck as you note aging and cognitive decline are real issues so we may do the latter with both our investment accounts at some point anyways. Then the choice will just be how much to sell and when.
Does a plan to manage Sequence of Return Risks mean "have cash" or are there other elements?

Brit71

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #20 on: February 09, 2024, 08:08:55 AM »
I'm currently going through Ben Felix's videos on Dividend Investing, and one thing is niggling me - long term dividend growth stocks outperform the market.  That may be because they are a subset of value stocks - but if it's a reliable market beating indicator why should we be going into Index funds with the obvious (and very important) caveat that most retail investors can't keep the dividend up.

There is an argument on diversification, but how much more diversification do you need past 20 stocks in different sectors if there's a solid record of beating the market?
« Last Edit: February 09, 2024, 08:11:42 AM by Brit71 »

Retire-Canada

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #21 on: February 09, 2024, 08:10:17 AM »
Does a plan to manage Sequence of Return Risks mean "have cash" or are there other elements?

There's no specific answer. I always prefer multi-layered risk management plans so I have options depending on what the manifested problem actually looks like.

My FIRE SORR/Risk Mgmt Plan had the following elements:

- 5 years of cash/bonds
- PT work
- flexible spending
- LOC available
- GF was continuing to work FT and could cover expenses if needed

Everyone's plan will be different depending on your personal factors/priorities.

I quit FT work right at the start of the pandemic when markets had crashed so I got to test out my mental commitment to the plan!
« Last Edit: February 09, 2024, 08:16:56 AM by Retire-Canada »

Brit71

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #22 on: February 09, 2024, 08:19:46 AM »
Does a plan to manage Sequence of Return Risks mean "have cash" or are there other elements?

There's no specific answer. I always prefer multi-layered risk management plans so I have options depending on what the manifested problem actually looks like.

My FIRE SORR/Risk Mgmt Plan had the following elements:

- 5 years of cash/bonds
- PT work
- flexible spending
- LOC available
- GF was continuing to work FT and could cover expenses if needed

Everyone's plan will be different depending on your personal factors/priorities.

I quit FT work right at the start of the pandemic when markets had crashed so I got to test out my mental commitment to the plan!
Five years!  I take it that the vast majority of that is in bonds.

Are bonds partly investment as well, in that if something like zero interest rates came back you'd shift a proportion away to shares?  What is your irreducible limit?

Sorry for all the questions, and if they're too personal please tell me to bog off.

Retire-Canada

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #23 on: February 09, 2024, 08:36:40 AM »
Five years!  I take it that the vast majority of that is in bonds.

Are bonds partly investment as well, in that if something like zero interest rates came back you'd shift a proportion away to shares?  What is your irreducible limit?

Sorry for all the questions, and if they're too personal please tell me to bog off.

My portfolio was 100% equities until I was ready to give up my FT work. At that point I sold some stocks and accumulated some cash.

I started with something like 2 years in cash and 3 years in bonds. I'm not replacing spent cash/bonds so eventually I'll have a 100% equities portfolio. Either the cash/bonds get spent when I don't want to sell equities when markets are down or the equities will grow such that the cash/bond portion becomes a negligible portion of the overall portfolio. Either way that part of the asset allocation does its job and doesn't cause any issues.

The combination of some PT work, a small inheritance [father died], and largely excellent market returns mean I've got through the initial years of retirement with a significantly larger portfolio than I started with.

Stimpy

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #24 on: February 09, 2024, 10:01:17 AM »
I'm currently going through Ben Felix's videos on Dividend Investing, and one thing is niggling me - long term dividend growth stocks outperform the market.  That may be because they are a subset of value stocks - but if it's a reliable market beating indicator why should we be going into Index funds with the obvious (and very important) caveat that most retail investors can't keep the dividend up.

There is an argument on diversification, but how much more diversification do you need past 20 stocks in different sectors if there's a solid record of beating the market?

So the key your missing here is "Long Term"   The fact that they are dividend stocks, while not irrelevant, is only relevant if your building with the cash, or using them to fund your lifestyle. 
The long term a is key due to tax benefits will come into play when your having to make what ever small changes to your portfolio due to following your IPS. (Which as a GOOD investor, indexer or not, you should HAVE!)  It also lowers you time, and cost to take care of your portfolio.  Finally Long term investors will, in general, outperform traders every time.  So, take that into consideration

20 stocks if fully diversified would be fine but... lets say for argument sake that those 20 stocks represent equal parts of your income and is exactly what you need.  Can you risk having a... WBA or, a OMI, or insert another long term stock that cuts its dividend, albeit with good reason?     

Diversification helps when that happens, cause it means everyone else will stay the course, for the most part.  But going beyond that, just help ensure that when those cuts happen (Cause they will) that it has less of an impact on your income, AND helps create some redundancy.  ie. A good dividend investor imo, probably has a little more income  then they need, so that WHEN that cut happens, it doesn't effect them as much, if at all.  After all, if each stock is only, 2% of your overall income...... 

Having said all of that....  Since I do both (DGI and Index) and since long term is the important part.... MOST people should probably just not try to build their own portfolio so they don't have to worry about those cuts, and should just... Index.   The long term nature, of either strategy will work in your favor.  Indexers just have to know less (about the stocks they are investing in...) and have less work overall.
« Last Edit: February 09, 2024, 10:18:39 AM by Stimpy »

Brit71

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #25 on: February 10, 2024, 01:34:01 PM »
I'm currently going through Ben Felix's videos on Dividend Investing, and one thing is niggling me - long term dividend growth stocks outperform the market.  That may be because they are a subset of value stocks - but if it's a reliable market beating indicator why should we be going into Index funds with the obvious (and very important) caveat that most retail investors can't keep the dividend up.

There is an argument on diversification, but how much more diversification do you need past 20 stocks in different sectors if there's a solid record of beating the market?

So the key your missing here is "Long Term"   The fact that they are dividend stocks, while not irrelevant, is only relevant if your building with the cash, or using them to fund your lifestyle. 
The long term a is key due to tax benefits will come into play when your having to make what ever small changes to your portfolio due to following your IPS. (Which as a GOOD investor, indexer or not, you should HAVE!)  It also lowers you time, and cost to take care of your portfolio.  Finally Long term investors will, in general, outperform traders every time.  So, take that into consideration

20 stocks if fully diversified would be fine but... lets say for argument sake that those 20 stocks represent equal parts of your income and is exactly what you need.  Can you risk having a... WBA or, a OMI, or insert another long term stock that cuts its dividend, albeit with good reason?     

Diversification helps when that happens, cause it means everyone else will stay the course, for the most part.  But going beyond that, just help ensure that when those cuts happen (Cause they will) that it has less of an impact on your income, AND helps create some redundancy.  ie. A good dividend investor imo, probably has a little more income  then they need, so that WHEN that cut happens, it doesn't effect them as much, if at all.  After all, if each stock is only, 2% of your overall income...... 

Having said all of that....  Since I do both (DGI and Index) and since long term is the important part.... MOST people should probably just not try to build their own portfolio so they don't have to worry about those cuts, and should just... Index.   The long term nature, of either strategy will work in your favor.  Indexers just have to know less (about the stocks they are investing in...) and have less work overall.
Thank you for that, and what you say about the work involved is certainly a consideration.  It's not a lot of work but it is a certain amount.  I'm reasonably relaxed on the tax.  All my holdings are in UK tax wrappers which allow the income to accrue tax free - it's withdrawal when they get taxed.

Generally I've gone through the first round of discussion threads and still haven't come to a conclusion.  I realise that this is really between the reliability of the 4% rule or dividend track records.  And I will need to read up more about both.  Companies dropping off the dividend aristocrat route seems to be the dark dirty secret, but the 4% rule also could well be based on a sustained run of luck in the US markets - and even then not be applicable to the UK.  A 4% withdrawal rate would already be worse than my current yield, a 3.5% withdrawal rate would mean quite a few extra years!

I also note that as well as dividend scepticism (dividends often get cut together, you're concentrating on low growth companies, high yields are often chosen over growing yields, oh and stock picking) there's a dividend phobia - that dividends if not a crime against the investor are value destroying.  That's barmy, there's no other way to return value overall than paying the profits, even if there are often great arguments for doing that in the future.  This isn't a reason for me to ignore dividend scepticism, that's where I am.
« Last Edit: February 11, 2024, 07:10:06 AM by Brit71 »

talltexan

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #26 on: February 22, 2024, 09:17:56 AM »
I had a co-worker who used this strategy. Caterpillar has worked out for him, but he also bought AT&T. Either you're picking so many stocks that you've essentially created an index, or you're picking so few that your returns--even if higher--aren't compensating you for the risk of one of your companies having to cut the dividend.

Eco_eco

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #27 on: February 24, 2024, 02:12:43 AM »
In terms of stocks I started out in the late 1990s as a dividend investor. The after a few years I realised that all the ‘blue chip’ companies that common consensus said were safe bets had challenges along the way. A very small number just kept chugging along, some boomed, but many had major set backs.

I think in the modern financial world the degree of information asymmetry is such that there is just no way of knowing if a company’s management remains sound and able to guide the company through its next crisis. Unless you are working in finance or high up in a particular industry.

Sure you can always find people who were lucky, the ones who bought Apple when Steve Jobs returned, or Facebook and Tesla in their early days, or Nvidia a few years ago. And you never hear about the ones who bought IBM at the wrong time, or Data General just before the end.

So I ended up as a passive index fund investor, who mainly DCAs in, but does tend to double down and invest more when stocks are crashing, and therefore cheap.

Brit71

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #28 on: June 14, 2024, 02:34:33 AM »
Just to report that I've defected and am now an indexer

Just wondering whether tracking three index funds is too narrow and should bite the trading charges and potentially higher charges to go for a worldwide fund.

Stimpy

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #29 on: June 14, 2024, 08:39:41 AM »
Just to report that I've defected and am now an indexer

Just wondering whether tracking three index funds is too narrow and should bite the trading charges and potentially higher charges to go for a worldwide fund.

Depends on the indexes, if your doing things like the Snp500, your good if its like a tech index... maybe not?   BUT, if I had to guess, your probably fine.   If you want to bite the bullets and do a worldwide fund, it's not gonna hurt you (I am assuming it's not huge fee , ie above or at 1%).  The choice as always is up to you.

Retire-Canada

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #30 on: June 14, 2024, 08:48:48 AM »
Just to report that I've defected and am now an indexer

Just wondering whether tracking three index funds is too narrow and should bite the trading charges and potentially higher charges to go for a worldwide fund.

I'm in Canada and I have:

- CDN Index
- US Index
- Int'l Developed Index
- Int'l Emerging Index

Rob_bob

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #31 on: June 14, 2024, 11:35:35 AM »
Just to report that I've defected and am now an indexer

Just wondering whether tracking three index funds is too narrow and should bite the trading charges and potentially higher charges to go for a worldwide fund.

What three funds are you using and what funds are you looking at possibly using?

Brit71

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #32 on: June 14, 2024, 01:10:31 PM »
Just to report that I've defected and am now an indexer

Just wondering whether tracking three index funds is too narrow and should bite the trading charges and potentially higher charges to go for a worldwide fund.

Depends on the indexes, if your doing things like the Snp500, your good if its like a tech index... maybe not?   BUT, if I had to guess, your probably fine.   If you want to bite the bullets and do a worldwide fund, it's not gonna hurt you (I am assuming it's not huge fee , ie above or at 1%).  The choice as always is up to you.
Vanguard Total World Stock has an expense ratio of 0.07%.  But I must find out whether that's the expense ratio that's available in the UK.

Brit71

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #33 on: June 14, 2024, 01:11:37 PM »
Just to report that I've defected and am now an indexer

Just wondering whether tracking three index funds is too narrow and should bite the trading charges and potentially higher charges to go for a worldwide fund.

What three funds are you using and what funds are you looking at possibly using?
I've got three vanguard funds roughly equal - FTSE100, European ex-FTSE, S&P 500

Rob_bob

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Re: Fun discussion ETF investing vs Dividend investing
« Reply #34 on: June 15, 2024, 01:29:28 PM »
Just to report that I've defected and am now an indexer

Just wondering whether tracking three index funds is too narrow and should bite the trading charges and potentially higher charges to go for a worldwide fund.

What three funds are you using and what funds are you looking at possibly using?
I've got three vanguard funds roughly equal - FTSE100, European ex-FTSE, S&P 500

It looks like you have most of the developed countries covered, don't know what your ER are. You could look at VEU-All world ex US and VTI for US.  Or just VT for whole world.

Just depends on how simple you want it to be, what the total ER is, or if you want to tilt a little to one country or another?