Questions about Dividend Funds (ETFs)

[TheDood]

Hello All,

I'm a new member of the MMM community and figured I would try asking these questions here to get your opinions.  I have been working on getting my financial situation in order over the past year (and was delighted to discover MMM several months ago) and have gotten myself to what I think is a good starting position with my investments.  But on to the specifics:

I opened a Roth IRA last year and made my maximum contributions for both 2012 and 2013, and then wound up opening a regular taxable brokerage account as well for additional contributions.  I use TD Ameritrade and have focused my whole portfolio on using their commision-free ETFs, since it gives me at least some amount of built-in diversification and no-fee trades while I'm still learning the ropes.  I've been using all Vanguard funds for the low expense ratios and was happy to see that Vanguard is popular with the MMM community.

The largest percentage of my asset allocation has so far been with the Vanguard Total Stock Market fund (VTI), but I have been reading a lot lately on the Dividends vs. Total Returns debate.  From what I have read so far, this seems to be more of a personal taste selection with roughly equivalent returns either from dividend income or capital gains.  Some people seem to prefer one over the other, and some even suggest a mixture of both.

I currently hold positions in VTI in both my Roth IRA and taxable accounts, but I am wondering if perhaps I should switch to something like the Vanguard Dividend Appreciation fund (VIG) for my Large Cap position in the IRA and keep the VTI in the taxable account.  It seems like it may be a good idea on paper but I am still educating myself on investing and not entirely certain if there'd be any real advantage to doing this or not.

Can any of you offer any advice or suggestions regarding this?  Just curious to hear any thoughts or comments you all might have before I rebalance in the near future...

Oh, and some additional info:  I am 40 (so a bit of a latecomer to the FIRE movement, but going to do my best to get started) and total value of my IRA and taxable accounts is currently only about $11-12k in each.  I also have a 401k at work that I contribute to just enough for the maximum 4% employer match, but that won't be affected by these particular dividend ETF questions...

[brewer12345]

It may be largely a wash between an index and a dividend index.  However, I have started using a dividend etf (SCHD) as a significant component of my domestic equity allocation.  I don't particularly have a bee in my bonnet about dividend income, but I note that the dividend funds tend to be less volatile than the broad index funds.  As I get closer to semi ER, tamping down volatility has significant appeal.

[Tyler]

FWIW, the yield on VTI is currently 2.00% with a 0.06% ER.  VIG is 2.17% with a 0.13% ER.  So the dividend fund is only paying out an extra 0.10% once you account for expenses and less than that if it's in a taxable account.  I'd consider them a wash.

I personally own VTI for the broad diversification, total returns, and very low fees.

[TheDood]

Thanks for the replies, you both have good points.  It does really seem that they'd be roughly equivalent overall and it sounds like you'd both agree with that.  I had previously thought of dividend funds as something more tailored to people who are focusing more on steady dividend income specifically (perhaps already in ER), but the aspect of lower volatility has its appeal as well (and with no tax on dividends in the Roth IRA as a bonus).

I appreciate the input, but so far that kind of reinforces my position of being on the fence about it, lol.  I dunno, maybe it's best to just stick w/ VTI and not makes things needlessly complicated with an extra ETF.  Been going for a decently balanced semi-lazy portfolio so far, perhaps I will just stick with that plan...

If anyone else has pro/con arguments for VTI vs. VIG I'd welcome any other advice :)

[the fixer]

Simple portfolios are the best ones (less for you to manage, less likely you'll call your plan into question in a year or two). If you want to add something new, it should have an obvious and clear purpose. It's not worth making things more complicated for such a small distinction.

[smedleyb]

Would you consider an overseas dividend ETF?  The DFJ (Japanese small cap dividend ETF from Wisdom Tree) seems to have perked up lately and I've been eyeing it for my own IRA. 

[TheDood]

@the fixer
I think you're probably right, without a clear and obvious advantage there's probably no need for me to switch it up.  I think I'm just going to stick with VTI and keep it simple.

@smedleyb
Thanks for the suggestion, but a Japanese small cap dividend ETF is probably a bit too narrowly focused for my personal tastes.  I prefer the more broad market funds for my portfolio, but I do have VEU for International exposure and a little bit of VWO for emerging markets.  I also haven't really looked at Wisdom Tree ETF offerings, I've been sticking with all Vanguard funds for the low expense ratios.

Thanks for the input guys :) I think my mind is made up to stay with VTI for now but feel free to post more comments if you'd like, maybe this post will help someone else if they have a similar question re: Dividend vs. Total Return funds...