Equity dividend investing vs equity index investing

[galeno]

Equity Dividend Investing ETFs
SCHD: Expected return = 7.12%. SEC Yield = 2.81%.
VIG: Expected return = 7.83%. SEC Yield = 1.96%.

Combo: Expected return = 7.48%. SEC Yield = 2.39%.


Equity Index Investing ETFs
VTI: Expected return = 8.51%. SEC Yield = 1.78%.
VXUS: Expected return = 10.65%. SEC Yield = 2.52%.

Combo = VT: Expected return = 9.50%. SEC Yield = 2.22%.

 

[photoguy]

I'm not sure of the exact point you are trying to make but how are you computing expected returns -- they seem on the high side to me (and also very precise)



Sent from my iPad using Early Retirement Forum

 

[Ed_The_Gypsy]

Hola, galeno. Nice to hear from you again.

phoyoguy, I am also not clear what his point is, but looking back at performance (very rough) for approximately the last 12 months:
Increase in NAV:
SCHD +12.75%
VIG +9.36%
VTI +12.17%
VXUS -6.6%
Distributions, based on beginning of year:
SCHD 2.92%
VIG 2.03%
VTI 1.95%
VXUS 3.14%

One interpretation might be that dividends alone will not give galeno his 4% annual withdrawal. Some selling would be required, but not much, and his total at the end of the year will still be more than at the beginning. (I was going to talk about harvesting and how his pot would have still grown by the end of the year, then I remembered his recent gig in California. My subconscious at work.)

 

[dallas27]

2 1/4 cups all-purpose flour
1 teaspoon baking soda
1 teaspoon salt
1 cup (2 sticks) butter, softened
3/4 cup granulated sugar
3/4 cup packed brown sugar
1 teaspoon vanilla extract
2 large eggs
2 cups (12-oz. pkg.) NESTLÉ® TOLL HOUSE® Semi-Sweet Chocolate Morsels
1 cup chopped nuts

PREHEAT oven to 375° F.

COMBINE flour, baking soda and salt in small bowl. Beat butter, granulated sugar, brown sugar and vanilla extract in large mixer bowl until creamy. Add eggs, one at a time, beating well after each addition. Gradually beat in flour mixture. Stir in morsels and nuts. Drop by rounded tablespoon onto ungreased baking sheets.

BAKE for 9 to 11 minutes or until golden brown. Cool on baking sheets for 2 minutes; remove to wire racks to cool completely.

PAN COOKIE VARIATION: Preheat oven to 350° F. Grease 15 x 10-inch jelly-roll pan. Prepare dough as above. Spread into prepared pan. Bake for 20 to 25 minutes or until golden brown. Cool in pan on wire rack. Makes 4 dozen bars.

SLICE AND BAKE COOKIE VARIATION:
PREPARE dough as above. Divide in half; wrap in waxed paper. Refrigerate for 1 hour or until firm. Shape each half into 15-inch log; wrap in wax paper. Refrigerate for 30 minutes.* Preheat oven to 375° F. Cut into 1/2-inch-thick slices; place on ungreased baking sheets. Bake for 8 to 10 minutes or until golden brown. Cool on baking sheets for 2 minutes; remove to wire racks to cool completely. Makes about 5 dozen cookies.

 

[ESRwannabe]

If you want to go the dividend income route (which I am) you aren't going to get there using funds.

In regards to your example, a lot of funds are essentially market cap weighted, so if the fund has 50+ stocks in it what you end up with is basically just a normal index fund with a higher ER.

To really build income you need to be willing to buy individual stocks and you need to be willing to invest when there is fear. Otherwise stocks are typically priced too high and you can't get in at a reasonable price.

What I have noticed with individual stocks is that there is almost always a crisis somewhere resulting in opportunities to buy stocks at a good price. Sometimes the crisis is real and if you were to buy in at that time you just screwed yourself. However my experience is that most things are way overblown. The market is like a manic depressive in my experience.

 

[galeno]

Many investors believe there is some type of "free lunch" by using selected dividend yielding equities instead of an equity index fund.

The point I'm trying to make is the "free lunch" isn't free. It costs about 2% CAGR.

 

[redduck]

2 1/4 cups all-purpose flour
1 teaspoon baking soda
1 teaspoon salt
1 cup (2 sticks) butter, softened
3/4 cup granulated sugar
3/4 cup packed brown sugar
1 teaspoon vanilla extract
2 large eggs
2 cups (12-oz. pkg.) NESTLÉ® TOLL HOUSE® Semi-Sweet Chocolate Morsels (note: highlighted by redduck)
1 cup chopped nuts...

...PREHEAT remove to wire racks to cool completely. Makes about 5 dozen cookies.

It's interesting that you mention Nestle in your post as its dividend yield is currently 3.27%. Of course, if you are an American citizen you need to deal with the pesky Swiss tax on dividends.

 

[NW-Bound]

From Wikipedia:

In 2011, Nestlé was listed No. 1 in the Fortune Global 500 as the world’s most profitable corporation. With a market capitalization of US$233 billion, Nestlé ranked No. 9 in the FT Global 500 2013.​

I see that Nestlé is traded as an ADR under the symbol NSRGY, and the dividend yield is shown as 2.76%. ()

I never had this stock, but still have Unilever, a similar Anglo-Dutch consumer staples corporation. For the past 5 years, the two stock returns are comparable. Both tracked the S&P 500 until the middle of 2014 when they started to slump.

 

[redduck]

From Wikipedia:
I see that Nestlé is traded as an ADR under the symbol NSRGY, and the dividend yield is shown as 2.76%. ()

I never had this stock, but still have Unilever, a similar Anglo-Dutch consumer staples corporation.

I found NSRGY's dividend yield at Schwab and at Dividend Investor.com.
I'm sticking to my 3.27%. Where did you find the dividend yield as 2.76%?

 

[NW-Bound]

Indeed Schwab and Scottrade, two of my brokerages, say that Nestlé's dividend is $2.42/share, which works out to 3.27% at the current price of $73.92.

But, but, but Morningstar and MSN Money say that the dividend is $2.03, which is 2.76%.

So, obviously, somebody has outdated data, but who?

On the other hand, Quicken says that my UL stock has paid $1.49/share in 2014, which is 3.66% at the stock's today price of $40.76/share. And that is real money that has already been deposited in my account, no question about that. And the above Web sites agree on that actual yield within a few pennies (why not to the penny?).

 

[redduck]

Indeed Schwab and Scottrade, two of my brokerages, say that Nestlé's dividend is $2.42/share, which works out to 3.27% at the current price of $73.92.

But, but, but Morningstar and MSN Money say that the dividend is $2.03, which is 2.76%.

So, obviously, somebody has outdated data, but who?

OK, I went to Fidelity for the tie-breaker and there it was: 3.27%.

I don't own Nestle either, but I do own Unilever.


Added:
Just went to the Wall Street Journal on-line: it has it at 3.28%.

 

[NW-Bound]

... I don't own Nestle either, but I do own Unilever.

Ah, great minds invest alike. However, we cannot claim true brilliance as Nestlé far outperformed Unilever from 2004 to 2014.

And to tie to this thread's topic, I looked up the performance of Nestlé (Swiss), Unilever (Anglo-Dutch), and Procter & Gamble (US) on Morningstar. It only has data going back 10 years, and it is difficult to get numerical values to quote here, but it shows all 3 are better than the S&P500 on the basis of total return with dividend reinvested.

A $10K invested in 2004 would grow to about $22.5K with S&P, a tad better with PG, about $29K with Unilever, and $38K with Nestlé.

 

[Ed_The_Gypsy]

Many investors believe there is some type of "free lunch" by using selected dividend yielding equities instead of an equity index fund.

The point I'm trying to make is the "free lunch" isn't free. It costs about 2% CAGR.

Point taken.

I recall one or two studies that showed that the best total performance equities
a) paid dividends, but
b) only paid out 40% of their earnings,
suggesting that the optimal choice is somewhere between dividend yielders and a simple index.

I am straddling the fence. Mostly slice-and-dice index funds, but have been seduced into buying selected energy stocks on weakness (and boy, there is a lot of weakness these days!). Expecting to move out of stocks into simpler funds sooner or later. Who knows? Maybe we will hold some of them forever.

 

[clifp]

I think one important thing for retirees to understand is that while dividend stocks don't necessarily have a higher return than non dividend stocks they do have lower volatility.

If dividend and no/low dividend stocks both return about 9%/year, 3% of the return will be from dividend stocks and 6% cap gains, low/no dividend stocks will be about 1%/8%. (historically the dividend return should be 1% higher) You'd expect to see less price swing among dividend stocks.

Statistically you can see this. Schwab Dividend SCHD, and Vanguard Dividend Growth and TR Price Dividend return all trailed the S&P 500 over 3 and 5 periods. Vanguard and TR Price outperformed over 10 and 15 year period Schwab hasn't been around that long. However, their standard deviation was lower for all time periods, and there are Sharpe ratio (risk adjusted return) was the virtually the same or higher for all of the time periods.

My taxable portfolio is 98% stocks, despite a 15% allocation to volatile VB (Vanguard small cap ETF) it is rare day that my portfolio loses or gains as much as the S&P. Likewise the Schwab portfolio tool also shows my my portfolio's volatility is lower than my AA would suggest, all because of my heavy dividend tilt.


Now volatility is good for people in the accumulation phase (see dollar cost averaging) but bad for those of us in retirement. I'd much rather lack the market by a couple of points during bull markets as long as I could outperform by a couple of points during bear markets.

 

[mathjak107]

you really can't generalize ,it really depends what you own. look at the volatility the darling of wall street DVY had in 2008 with its specially screened collection of dividend payers. it fell more than the market as dividends were slashed and cut. it was down 54% at one point if i remember. i owned a bit of it.

 

[clifp]

you really can't generalize ,it really depends what you own. look at the volatility the darling of wall street DVY had in 2008 with its specially screened collection of dividend payers. it fell more than the market as dividends were slashed and cut. it was down 54% at one point if i remember. i owned a bit of it.

I think that is more a function of DYY which contained a crazy number of banks stocks, than a general problem with dividend stocks.

If you divided the S&P 500 into high medium and low dividend yields, I can almost guarantee that the average beta of the highest paying stocks is lower than the lowest paying dividend stocks.

 

[mathjak107]

that may be true but usually it is hard to say in actual investing as it is the sector as well as the company that come in to play.

many times the highest yielding are not the highest yielding from raising their dividends but because they are the worst performing.

the dogs of the dow are usually the highest yielding and they can be quite volatile