Author Topic: Help with Index Fund Question; Dividends  (Read 9755 times)

NWOutlier

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Help with Index Fund Question; Dividends
« on: January 04, 2014, 01:24:48 PM »
Hi Everyone!

I have a newbie question for you all; I'm going to use round numbers just to illustrate my question - but I noticed when received my first dividends from VTSAX and VGSLX that the VGSLX was 3-4x higher per share pay out (historically as well), although the cost per share is about double for VGSLX.... so, my question is; shouldn't I buy more VGSLX over VTSAX?  Here is my example:

Using fake numbers to illustrate my question:
VTSAX: Cost $50/per share, pays out $.20 cents per share
VGSLX: Costs $100 per share, pays out $.60 - $.80 cents per share

I'm kinda moving down the road where I don't care what the total value of my account is (net worth)- I'm more interested in how much cash flow it creates, so that means my goal is "number of shares" more than total account value....

daverobev

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Re: Help with Index Fund Question; Dividends
« Reply #1 on: January 04, 2014, 01:31:59 PM »
The 'correct' answer is that only total growth matters - if one grows by 7% through 4% cap appreciation, the other 7% through cap appreciation, you just sell 3% of your fund to get the 3% out.

Money's money. Dividend payments are a reduction in the value of the company (or fund).

kyleaaa

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Re: Help with Index Fund Question; Dividends
« Reply #2 on: January 04, 2014, 06:22:46 PM »
Those funds are completely incomparable. One is a total stock market fund and the other is a REIT fund. You definitely SHOULD care about net worth. Higher net worth translates to higher potential cash flow per unit of risk. The income approach to investing will usually lead to lower income (adjusted for risk) over the long term.

wtjbatman

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Re: Help with Index Fund Question; Dividends
« Reply #3 on: January 04, 2014, 07:18:08 PM »
The income approach to investing will usually lead to lower income (adjusted for risk) over the long term.

Focusing on income now (assuming retirement is far off) leads to lower returns in the long term, but value/growth now and transitioning to income in retirement is pretty much the SOP for a lot of people.

StevenC68, VGSLX is a REIT fund. REITs, or Real Estate Investment Trusts, are required by law to distribute 90% of their taxable income to investors. This comes in the form of a dividend. That's why that fund has such a higher dividend yield than VTSAX (the total stock market fund). REITs can be a valuable part of any portfolio, but even hard core REIT investors usually only put 20% or less of their portfolio in REITs.

Ok, hard core investors might put more. But you get the idea, for most people, 10-20% is fine. You can reinvest those dividends in your REIT fund(s), or put that dividend money into other equities. It's nice having that option.

sdp

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Re: Help with Index Fund Question; Dividends
« Reply #4 on: January 04, 2014, 09:29:01 PM »
I recommend not only looking at the yield today, but payout ratio, price history and dividend growth.  While a high dividend looks promising in a snapshot of the company or fund, it might be high because the price of the company/fund has been performing poorly due to the underlying companies doing poorly, as is the case with VGSLX in addition to them needing to pay out most of their income. 
It all boils down to what your time horizon is... is this long term or short term?

Take the two examples below, NLY vs. MMM.  if you bought each respective stock 1 year ago, with an initial investment of $10,000 and received the dividend as cash without reinvesting, which seems to be your goal:

NLY: Todays Snapshot, Jan 3rd 2014: Price $10.00 with a dividend yield of 12.00% or .30 cents/share! looks pretty good!!

Anally Capital- a Reit composed of a portfolio of an assortment of real estate investments
Price on JAN 4th 2013 = $14.49
Purchased 690.13 shares with your $10,000 bucks.
Dividend #1: April 29th 2013,      $.45/share =          $310.56
Dividend #2: July 29th 2013,       $.40/share=           $276.05
Dividend #3: October 31st 2013,  $.35/share=          $241.55
Dividend #4: January 31st 2014, Will be $.30/share= $207.04

Price on Jan 3rd 2014 of $10.00 =    $6,901.30
Plus Cash at end of January of:         $1,035.20
_______________________________________
Total value of investment plus Cash= $7,936.50

_____________________________________________________________
MMM: Today Snapshot, JAN 3rd 2014: Price $138.45 with a dividend yield of 2.47% or .855 cents/share. doesn't look as good as Anally:

3M- a diversified Technology company:
Price on JAN 4th 2013 = $94.79
Purchased 105.496 shares with your $10,000 bucks.
Dividend #1: March 12th 2013,  $0.635/share = $66.99
Dividend #2: June 12th 2013,    $0.635/share = $66.99
Dividend #3: Sept 12th 2013,    $0.635/share = $66.99
Dividned #4:Dec 12th 2013,      $0.635/share = $66.99

Price on JAN 3rd 2014 of $138.45 = $14,605.92
Plus Cash at end of January of:             $267.96
___________________________________________
Total value of investment plus cash = $14,873.88.... almost double!!!

ALSO:
In the long term,  The NLY dividend cash payments will will be outpaced by the dividend growth of MMM anyway.
in 2010 NLY yearly dividend was $2.65 yielding $1828.84  that is a negative 17.28% dividend growth per year over the last 3 years!! VS. MMM which has had a POSITIVE dividend growth of 6.55% per year of the last three years, AND MMM has already announced the 2014 dividends will by $.855/quarter... that is over 34% increase from this year..  IF current trends continue for the rest of the decade the yearly dividend payouts for your original stock purchases would look like this:
YEAR:            NLY@ -17.28% growth      MMM@ 6.55% growth
_____________________________________________________
2014                         $856.32--------------------$360.80(we already know the payout for MMM will be this...)
2015                         $708.35                          $384.43
2016                         $585.94--------------------$409.61
2017                         $484.69                          $436.44
2018                         $400.94--------------------$465.02
2019                         $331.65                          $495.48
2020                         $274.34--------------------$527.98


Of course, who knows what the future markets hold, but usually companies/funds with a yield of more than 3-4% and a payout ratio more than 30-40% are not sustainable and the dividend growth is often negative, or at the very least doesn't keep up with inflation.  If you plan on holding the position for more than a couple of quarters (like a decade or more?) then pay close attention to the sustainability and growth of the dividend, stock price aside.
Cheers,
Scott

NWOutlier

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Re: Help with Index Fund Question; Dividends
« Reply #5 on: January 05, 2014, 12:21:13 PM »
Wow! 

I've been schooled!  Ok, first off let me thank all of you; I've been in the blog realm since 2009 and the quality of responses here far outweighs what I receive elsewhere.  There is enough information for my newbie brain here that I need to go back, re-read and attempt to understand.

My time horizon though is long term (10-25 years)...  I'm 45, no debt outside my home and I'm using a vanguard taxable account with VTSAX and VGSLX to supplement (or help me retire early) and pad my retirement.  I have a fully funded 401k, Pension, Spousal IRA and ROTH IRA (also considering an HSA)...

I'll be back with more questions, Happy New Year!

Steve