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Question about dividend stocks - Curious
Old 08-27-2015, 11:00 PM   #1
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Question about dividend stocks - Curious

DH and I recently retired, no pensions and 12/15 years until social security. Spending down taxable. I have mainly Vanguard Total Stock Mkt Admiral funds as equity and CDs, bonds, etc. I need to purchase more equities for our A/A and I like the idea of getting dividends. I'm fairly risk averse, but have to get my equity allocation where it needs to be. Are there mutual funds that contain stocks that have dividends? As opposed to having to buy individual stocks that pay dividends? Is it best to put into your taxable accounts as opposed to IRAs? I am a Vanguard customer; is this something that they can help me with or where is the best place to research dividend stock choices? Sorry if this is an elementary level question!

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Old 08-27-2015, 11:17 PM   #2
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DH and I recently retired, no pensions and 12/15 years until social security. Spending down taxable. I have mainly Vanguard Total Stock Mkt Admiral funds as equity and CDs, bonds, etc. I need to purchase more equities for our A/A and I like the idea of getting dividends. I'm fairly risk averse, but have to get my equity allocation where it needs to be. Are there mutual funds that contain stocks that have dividends? As opposed to having to buy individual stocks that pay dividends? Is it best to put into your taxable accounts as opposed to IRAs? I am a Vanguard customer; is this something that they can help me with or where is the best place to research dividend stock choices? Sorry if this is an elementary level question!

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For "normal" stocks I'd suggest VYM and VIG from Vanguard. Both are fine in taxable (qualified divs).

If your willing to deviate outside the box a little I suggest AMLP for MLPs (works fine in taxable, qualified divs) and VNQ for REITs (which I would try to put in a Roth IRA).

If your willing to take a walk on the wild side I'd try REM for mortgage REITs (definitely best place is in Roth IRA).

If you are interested in fixed income you could add preferreds (PFF) and/or junk bonds (HYG). Also emerging market debt (EMHY). All of these work best in a Roth IRA.

These are all ETFs.
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Old 08-28-2015, 06:33 AM   #3
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One of my favorites is Main Street Capital (MAIN) that currently pays over 7%. It's a well managed business development company that invests in nearly 200 established mid sized businesses. It weathered the 2008 financial crisis well and is financially sound. It pays a monthly dividend which is nice, but typically has two additional special dividend payments in June and December.
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Old 08-28-2015, 06:35 AM   #4
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VG Total Stock Mkt pays dividends. Maybe you don't realize it because you are reinvesting them. There are funds with higher dividend rates, but you are already getting dividends. https://investor.vanguard.com/mutual...ual-funds-list look at the SEC yield.

IMO you should focus on total return, or at least have a better reason for wanting more dividends than "liking the idea" especially since you don't even know you are already getting them.
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Old 08-28-2015, 07:55 AM   #5
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I have DVY, which pays ~3%. It is an ETF comprised of dividend paying stocks. NOBL is also another great one. NOBL is comprised of the dividend aristocrats.

With the S&P paying ~2%, and a much higher chance for growth, I prefer the S&P ETF of IVV.

Be careful of mutual funds with higher fees and expense ratios. Or front/back end loads. Or selling restrictions.
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Old 08-28-2015, 07:57 AM   #6
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Take a look at Vanguard dividend ETF funds....they have a few. Most pay between 2 and 3% each year. You can buy/sell them without any charges and you can look at non Vanguard ETF dividend funds that pay healthy dividends. Depending on your account size you may have some free trades or trades that only cost $2.00. Give Vanguard a call, they'll walk you through it. And, total stock does pay about 1.8% ( I think) which you already own.
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Old 08-28-2015, 08:21 AM   #7
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.... Are there mutual funds that contain stocks that have dividends? As opposed to having to buy individual stocks that pay dividends? Is it best to put into your taxable accounts as opposed to IRAs? ...
Most equity mutual funds, including your Vanguard Total Market Stock Fund, pay dividends and the dividends are typically a pass through of dividends that they received from their portfolio.

I think it is best to have my equity mutual funds in my taxable accounts. Check into this link:Principles of tax-efficient fund placement - Bogleheads
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Old 08-28-2015, 08:28 AM   #8
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Thanks everyone for the suggestions. I do realize that my total stock market pays dividends obviously as I can see they're being paid. I guess I was just thinking about other stocks that are mainly purchased because of their dividends or that pay higher dividends. I'm wondering if I should also look at the Retirement Income or Managed Payout. I've always stayed away from individual stocks, but just am tempted to look into some larger more stable companies that pay pretty good dividends. And I do get a certain number of free trades every month with Vanguard but have never really used them.

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Old 08-28-2015, 08:36 AM   #9
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If you want a dividend tilt, consider Vanguard Dividend Growth

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This fund is designed to provide investors with some income while offering exposure to dividend-focused companies across all industries. The fund focuses on high-quality companies that have both the ability and the commitment to grow their dividends over time. One of the fund’s risks is the possibility that returns from dividend-paying stocks will trail returns from the overall stock market during any given period. Another risk is the volatility that comes with the fund’s full exposure to the stock market. An investor with a well-balanced, long-term portfolio who seeks exposure to dividend-focused companies may wish to consider this fund.
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Old 08-28-2015, 08:54 AM   #10
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Old 08-30-2015, 12:12 AM   #11
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Since you seem to be the type of person who plays it safe (you AA is low in stocks), I would suggest you not buy individual companies, but stick to broadly based etf's or the low cost vanguard mutual funds.

Chasing dividend returns could have you buying a stock that pays a dividend of 6-8% and loses value of 10% or more in a year. At least with broadly based instruments there will not be a catastrophic decline because a company goes bankrupt.
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Old 08-30-2015, 01:08 AM   #12
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Since you seem to be the type of person who plays it safe (you AA is low in stocks), I would suggest you not buy individual companies, but stick to broadly based etf's or the low cost vanguard mutual funds.

Chasing dividend returns could have you buying a stock that pays a dividend of 6-8% and loses value of 10% or more in a year. At least with broadly based instruments there will not be a catastrophic decline because a company goes bankrupt.
But sometimes people want or need dividends when they need more income than the 1.81% that the Total Stock market provides.

Not everyone winds up at the end of the road in the same way. Meaning many people didn't work for mega corps with fund matching 401K's and a two income families with a long term savings horizon.

Some people got there late in life stash from real estate or a business they owned and sold, and want to enter the market closer to their retirement years, and because they don't have any pensions to help with cash flow, then more may be needed from the portfolio to meet expenses. Many new retirees were counting on having 5% bonds and 6% CD's available when they retired to help with cash flow.

Most people would rather be able to obtain that income from dividends and interest, because there is not always appreciation, and since they are not accumulating anymore, the possibility of buying into a downward trajectory or even a sideways trajectory can be pretty scary.

I understand fully how a growth approach works to someone's favor over a long term horizon. But not everyone chose this model or had the option. This couple, and many others like them are retiring and need income.

What I don't understand, is how someone can argue that there is really no difference in withdrawing from only dividends or from capital appreciation. Sometimes there is no appreciation for a long time, so it's the principal (the seeds) that must be sold to raise capital.

What about the times that saw a continued sideways or down spiral, some lasting over 10 years. Would not that individual be better off with having a larger income stream instead of growth stocks then and having to rely on appreciation? Those two to three years cash reserves would hardly see someone through this kind of market?

What I don't understand is the logic when someone who has followed the total return approach says there is no difference where the money comes from. I am not in favor of tilting too far into bond funds either, as then you can lose due to inflation. I'm speaking of your typical 60/40 mix. (not that bonds would give you any income lift today)

Trying to create an income portfolio today is very chalanging for retirees if you would just like to stay in indexes unless you have a very large portfolio. Otherwise you have to venture out into junk bonds, individual stocks, MLP's, and preferreds to get there. (or some other stuff that is above my pay grade) All the typical sources of income to help retires with an income flow have vanished today, so income to help retirees retire requires a little more than it did in the past.

I think the suggestions as to where to look might be more appreciated by posters seeking income. I don't think anyone today is expecting 7 to 10% dividends or bonds. Just somewhere to look to possibly give a bump to their yield in a sensible manner, and who better to ask than people on this board.


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Old 08-30-2015, 08:06 AM   #13
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At the fundamental level, it is only net earning that matters. For the same earning, if company A pays more dividend than company B, then A has less retained earning to grow its business. Company B will be able to grow more and its stock appreciates more with time to make up for less dividend.

I just look at a comparison between DVY, a popular dividend-paying ETF, and SPY, the S&P ETF. The time frame is from the inception of DVY in 2003 up until now. This chart shows the price only, meaning no dividend has been reinvested.

DVY that currently pays 3.21% appreciates 44% in 12 years. SPY that currently pays 2.1% appreciates 79% in the same time period.

The difference between 79% and 44% growths is a higher annualized growth rate of 1.8%. This more than makes up for the 1.1% difference in dividends.

One should also note the higher loss suffered by DVY in the 2008 Great Recession. This was caused by its financial and banking components. Dividend-payers are not always more stable than the total market.

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Old 08-30-2015, 09:24 AM   #14
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Vanguard has several dividend focused funds: Equity Income, Dividend Growth, Dividend Appreciation, and Wellington (includes bonds).

NW-Bound makes a good case for paring SPY with your total market index fund.
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Old 08-30-2015, 09:36 AM   #15
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DVY that currently pays 3.21% appreciates 44% in 12 years. SPY that currently pays 2.1% appreciates 79% in the same time period.

The difference between 79% and 44% growths is a higher annualized growth rate of 1.8%. This more than makes up for the 1.1% difference in dividends.

One should also note the higher loss suffered by DVY in the 2008 Great Recession. This was caused by its financial and banking components. Dividend-payers are not always more stable than the total market.
Compare VIG to S&P and things look much better.

One wants dividend growers not high payers IMO. Even BRK (which does not pay dividend) is loaded with high quality dividend growers.
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Old 08-30-2015, 10:23 AM   #16
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But then VIG currently pays 2.18%, vs SPY 1.92%, not a whole lot of difference.

BTW, the earlier quoted S&P dividend of 2.1% came from another source, which I forgot. Stock market is in turmoil now, so the quoted yield may vary 10% from one source to another if they do not all keep current.

But I agree that going for higher yield can get you in trouble. The yield may be high because the companies are in decline, hence the stock price drops, making the yield look good. Then, the yield will eventually drop to match the price, and you lose both dividend and principal.

The above said, my total portfolio dividend is a bit higher than that of the S&P. It is because I shun hot growth stocks, not because I specifically look for yield.
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Old 08-30-2015, 10:36 AM   #17
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But then VIG currently pays 2.18%, vs SPY 1.92%, not a whole lot of difference.
Yea but its dividend yield grows faster and in 2008-2009 it had no reduction in dividend payment.
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Question about dividend stocks - Curious
Old 08-30-2015, 11:09 AM   #18
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Question about dividend stocks - Curious

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Originally Posted by NW-Bound View Post
At the fundamental level, it is only net earning that matters. For the same earning, if company A pays more dividend than company B, then A has less retained earning to grow its business. Company B will be able to grow more and its stock appreciates more with time to make up for less dividend.

I just look at a comparison between DVY, a popular dividend-paying ETF, and SPY, the S&P ETF. The time frame is from the inception of DVY in 2003 up until now. This chart shows the price only, meaning no dividend has been reinvested.

DVY that currently pays 3.21% appreciates 44% in 12 years. SPY that currently pays 2.1% appreciates 79% in the same time period.

The difference between 79% and 44% growths is a higher annualized growth rate of 1.8%. This more than makes up for the 1.1% difference in dividends.

One should also note the higher loss suffered by DVY in the 2008 Great Recession. This was caused by its financial and banking components. Dividend-payers are not always more stable than the total market.


100% agree with you, NW. Basically a dividend is, "you can be more effective with the excess cash than we can". But, as we all know, the price of its stock isnt always its intrinsic value, but ultimately just what one is willing to pay for it. A dividend can mentally help one ride out the storm when stock buyers are not willing to pay as much for earnings (or losses depending on the company).
That is what helps me (mental part). If my preferreds do nothing price wise, I gladly take the 6-7% of safe divis and move on. If they would ever tank 20% no sweat, I got my money back in 3 years. Since I am reinvesting all dividends, in effect, this would actually increase my yearly income.
In no way am I suggesting this strategy will beat a pure common stock market investing strategy. In fact odds are it wont. But investing for income has its pluses and its minuses.



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Old 08-30-2015, 11:40 AM   #19
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100% agree with you, NW. Basically a dividend is, "you can be more effective with the excess cash than we can".
And what is dividend that lets say for 40 years grows faster then inflation every single year of those 40 years?
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Old 08-30-2015, 11:40 AM   #20
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Yea but its dividend yield grows faster and in 2008-2009 it had no reduction in dividend payment.
Yet, when I look over the life of the fund VIG and compare it to SPY in terms of total return, the difference is not significant (Morningstar plot crams them together and I could not discern the difference).

What is more important is that VIG suffered a much less drop in the Great Recession, and that is important for the reason that Mulligan pointed out in his post.

But if investors go to dividend stocks because they need the 3 or 4% dividend, they should be aware that they are paying for that in the long term, meaning that their stocks may not catch up with inflation as well as the broader market. They would not be happy with your VIG paying 2.18%.

Dividend payers for stability, yes. For more money, no. And if you go out on a limb for high dividend yield, you may get into danger without realizing it. The market is "efficient" in that manner. There's very little free lunch. Well, maybe a small free pretzel, but 50% or 100% more dividend is a lot, and does not come free.


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100% agree with you, NW. Basically a dividend is, "you can be more effective with the excess cash than we can". But, as we all know, the price of its stock isnt always its intrinsic value, but ultimately just what one is willing to pay for it. A dividend can mentally help one ride out the storm when stock buyers are not willing to pay as much for earnings (or losses depending on the company)...
Totally agree with you about investor's psychology. I have seen Joe Blows buying when the news is good, and dumping when the sky is falling. And owning some stocks forces me to follow the market vagaries and maybe, just maybe lets me discern the madness of the crowd and allows me to be a contrarian.

It's tough, but I am still learning. What else for an ER to do? You don't really know anything until your own real money is at stake. You don't know what war is until you are cowering in a manhole clutching your rifle. It makes life less boring. Heh heh heh...
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