Dividend ETF vs Individual Dividend Stocks

[JackJester]

I have always wondered if it is better to own an ETF in a particular category vs owning the individual stocks of that ETF in your portfolio. In particular, I am focussed on Dividends, and I own a good amount of Schwab U.S. Dividend Equity ETF (SCHD). I always wondered if the majority of owners of the ETF actually focus on the holdings of that ETF vs simply buying or selling based on the overall momentum of the market. So, today, with markets down sharply, I crunched some #s. In the picture I show that SCHD was down -1.38% today, and the average performance of the ETF’s top 30 holdings was nearly equivalent (down -1.45%). I have thought about building my own dividend portfolio, but right now I question its benefit vs simply owning the ETF. While this is only 1 data point, does anyone know if there are data out there that track an ETFs performance over time vs the ETF’s indivdual holdings? IOW, does an ETF out-perform, equal, or under-perform its holdings? Sorry if this is a stupid question, please educate me
Jack

 

[ERD50]

IOW, does an ETF out-perform, equal, or under-perform its holdings? Sorry if this is a stupid question, please educate me

No, not stupid at all. But the ETF/fund will under-perform its holdings by the expense ratio. That's the only other place for the money to go. It would include admin, advertising, trading costs, and I guess any other profit they skim off the top (that might just be admin though?).

The top 30 holdings probably make up a very large % of the total fund.

Are you thinking of buying the top 30 to create your own fund? Testing it might be tricky, depending how often the top 30 change. You could plug the current top 30 here, and see:

https://www.portfoliovisualizer.com/backtest-portfolio

Let us know!

And I have to ask - why focus on div payers? Look at some recent threads here, they have links to previous discussions too. The div payer funds don't really act much different from the broad market. There is no magic in dividends.

http://www.early-retirement.org/forums/f28/high-dividends-stock-etfs-mfs-94721.html#post2140498

-ERD50

 

[target2019]

I have always wondered if it is better to own an ETF in a particular category vs owning the individual stocks of that ETF in your portfolio.

It is much simpler, as you have only one decision - buy SCHD or not.

We have two brokerages, and one is much simpler. In that brokerage we buy SCHD. In the 30 stock brokerage, there is much more work. Frankly, it is probably time to swap all that for SCHD, etc.

You can get more dividend with individual stock. SCHD pays about 2.25%. If you weight the dividend of the 30 in your list, I'm pretty sure it will be at least 3%.

And there are many here who say this is insane, buy the whole market.

 

[maestro]

All questions are worth asking as no one on the forum knows everything. I too 'question' the effectiveness of a basket ETF of dividend stocks like SCHD vs. individual stock preference. The basket you show illustrates the 'cyclical' nature of many of those stocks which IMHO can be a detriment to overall 'growth' of the price of your ETF. Are you really looking for growth or dividends? I prefer utility stocks, returning 4-6% which have predominantly produced their returns from that perspective, yet maintain or grow their price as long as their PE doesn't get too out touch with reality. I like T and VZ which are 'almost' like utilities.

 

[JackJester]

I have read the threads comparing growth vs dividend portfolios and can see the merits of each camp. I expect to be in the 12% tax bracket when I retire in the next 2 years and dividends are taxed at 0%. So, that's free $. I guess right now while I'm working for the man, I don't have time to manage a dividend portfolio on my own. Thus, I buy the ETF. But, maybe when I retire I can devote the time to research and do it properly. I bought GE at $32 a few years ago, so I'm not really expert in this matter. ha ha. The top 30 holdings of SCHD comprises 83% of total holdings. SEC yield 30 day is 3.10%. Gross Expense Ration is 0.07%. I guess I'll keep feeding the ETF for 2 more years and re-assess when I retire. Thanks!

 

[Ronnieboy]

I have been reading a series of articles from Chuck Carnevale on Seeking Alpha about "building a stock dividend portfolio from scratch" https://seekingalpha.com/article/4212296-building-dividend-growth-portfolio-scratch-15-a-rated-better-fairly-valued-opportunities?app=1&isDirectRoadblock=false

He basically states in this article or some that follow that 20-25 stocks across most of the sectors of the market will provide an adequately diversified portfolio.

So to me I would look at copying the top 20-30 stocks in the ETF and maybe subbing some out if they are too concentrated into one sector of the stock market (like I don't see any food type companies listed in the top 30(K, GIS, CAG, HRL)) and let it ride from there. You'd save at the minimum the expense ratios and depending on where you park it - the trading fees can be zilch (RobinHood). Or you could make your own Motif at Motif.com Either way it could be a good test portfolio for a few years.

And you might beat the dividend payout that SCHD is paying.

 

[target2019]

You can definitely beat the dividend payout of SCHD.
One of the major points made by Chuck Carnevale is that of purchasing a company's stock at good valuation. The tool he uses helps do that.
If I were starting out, I would definitely start an account with no or low trading fees.

 

[audreyh1]

I have read the threads comparing growth vs dividend portfolios and can see the merits of each camp. I expect to be in the 12% tax bracket when I retire in the next 2 years and dividends are taxed at 0%. So, that's free $. I guess right now while I'm working for the man, I don't have time to manage a dividend portfolio on my own. Thus, I buy the ETF. But, maybe when I retire I can devote the time to research and do it properly. I bought GE at $32 a few years ago, so I'm not really expert in this matter. ha ha. The top 30 holdings of SCHD comprises 83% of total holdings. SEC yield 30 day is 3.10%. Gross Expense Ration is 0.07%. I guess I'll keep feeding the ETF for 2 more years and re-assess when I retire. Thanks!

It will be tough to outdo SCHD considering its very low expense ratio, but some people really enjoy the hobby of managing individual sticks and having that degree of control over their holdings.

Not for me! I’m too busy doing other things in retirement.

 

[BoodaGazelle]

I have owned a mostly dividend paying portfolio for many years, and am slowly moving towards a Bogleheads index fund approach. The beauty of an S&P or total market index is that you get the same stocks (at least, say, Dogs of the Dow), so you are not missing those dividends.

If you could make it with the typical long-term gain of the S&P, then why would you risk *any* of your money betting that AT&T will be able to pull off their transition to an Internet TV world without going out of business (remember Kodak)? Plus, if in 5 years, the new Internet TV companies have come out of nowhere and are the new Google/Apple/Amazons, you will already have them in your index fund.

Good luck with your decision. It is hard to pull the plug when you (as I do) have solid dividend payers that you bought many years ago, but I am moving there slowly.

 

[misanman]

My decision has been and is to go with SCHD. I still have a number of individual dividend paying stocks but have been selling covered calls and, if/when the stock is called away, reinvesting the proceeds in SCHD.

 

[ERD50]

.... I expect to be in the 12% tax bracket when I retire in the next 2 years and dividends are taxed at 0%. So, that's free $. ...

Long Term Capital Gains are also taxed at 0%. So, that's free $.

Divs have no advantage in that regard.

And LTCGs have other potential advantages, in certain cases. I'm likely to pass the equities in my taxable account on to heirs (income from RMD, SS & pensions will cover expenses). So I don't realize those gains, and will be stepped up, and never taxed for me or my heirs.

While dividends will be realized each year, no control over them, and for my future case, taxed at 15% if Qualified, and 22% if Non-Q.

LTCG losses can also be used to offset gains, resulting in zero tax. Divs do not have this flexibility.

All I see are disadvantages, and no advantages. The dividend approach is an illusion.


-ERD50

 

[ERD50]

I just discovered another potential negative to SCHD. Some of the divs may be non-qualified.

https://ycharts.com/companies/SCHD/dividend

When I plug the numbers in here, with no other income, MFJ can have $101,200 in either Qualified divs, or LTCG and pay $0 tax.

But make those divs Non-Q, and you owe $8,883. Or $2,811 if half are Non-Q.

https://www.mortgagecalculator.org/calcs/1040-calculator.php

-ERD50

 

[Bruceski44]

The ETFs must operate within these constraints which may limit their performance:
1. They must be large enough to sell shares of the fund at NAV to millions of subscribers.
2. They are restricted to owning no more than 10% of any individual position.
3. Due to sheer volume, their moves in and out of positions are done slowly, over a long period of time, which makes them slow to react to opportunities.

Because of the constraints, ETFs (or MFs) must buy the bad along with the good, and have a relatively static composition. The bad stocks limit performance, they can't buy more of the good stocks and they cannot react quickly to changing market conditions, like we are seeing now. IMO, this is why none of the funds can match the performance of solid, well-bought individual stocks.

 

[braumeister]

I just discovered another potential negative to SCHD. Some of the divs may be non-qualified.

Not likely. All qualified in the past.

 

[ERD50]

....

Because of the constraints, ETFs (or MFs) must buy the bad along with the good, and have a relatively static composition. The bad stocks limit performance, they can't buy more of the good stocks and they cannot react quickly to changing market conditions, like we are seeing now. IMO, this is why none of the funds can match the performance of solid, well-bought individual stocks.

And yet, I have not seen anyone present a testable approach to this. There ought to be some record of stock picks for each year, based on some objective criteria, going back a decade or more. We could analyze those criteria.

But if it is just some claim like a paraphrase of the Will Rogers quote - only buy stocks that go up, well, that isn't actionable.

The only out-performance claims I've seen here turned out to be a rear-view mirror look. Pretty much like the Will Rogers approach - pick stocks that have done well for 25 years (paid consistent, increasing divs), buy them 25 years ago, and they did great!

I bet some non-div payers would beat that approach as well! Not that it would do anyone any good to say "Buy AAPL 25 years ago".

-ERD50

 

[ERD50]

Originally Posted by ERD50
I just discovered another potential negative to SCHD. Some of the divs may be non-qualified.

Not likely. All qualified in the past.

Not according to the link I found. Is it wrong?

https://ycharts.com/companies/SCHD/dividend

-ERD50

Schwab US Dividend Equity ETF™ Historical Dividend Data
View and export this data going back to 2011. Start your Free Trial
Ex-Date Record Date Pay Date Declared Date Type Amount
09/25/2018 09/26/2018 09/28/2018 -- Non-qualified 0.3668
06/26/2018 06/27/2018 06/29/2018 -- Non-qualified 0.4056
03/16/2018 03/19/2018 03/22/2018 -- Non-qualified 0.2615
12/18/2017 12/19/2017 12/22/2017 -- Qualified 0.3448
09/18/2017 09/19/2017 09/22/2017 -- Qualified 0.3439
06/19/2017 06/21/2017 06/23/2017 -- Qualified 0.3312
03/20/2017 03/22/2017 03/24/2017 -- Qualified 0.3258
12/19/2016 12/21/2016 12/23/2016 -- Qualified 0.3987
09/19/2016 09/21/2016 09/23/2016 -- Qualified 0.2438
06/20/2016 06/22/2016 06/24/2016 -- Qualified 0.3174
03/21/2016 03/23/2016 03/28/2016 -- Qualified 0.2981
12/21/2015 12/23/2015 12/28/2015 -- Qualified 0.2715
09/21/2015 09/23/2015 09/25/2015 -- Qualified 0.2989
06/22/2015 06/24/2015 06/26/2015 -- Qualified 0.3063
03/23/2015 03/25/2015 03/27/2015 -- Qualified 0.2699
12/22/2014 12/24/2014 12/29/2014 -- Non-qualified 0.2754
09/22/2014 09/24/2014 09/26/2014 -- Non-qualified 0.2544
06/23/2014 06/25/2014 06/27/2014 -- Non-qualified 0.2693
03/24/2014 03/26/2014 03/28/2014 -- Non-qualified 0.2478
12/23/2013 12/26/2013 12/30/2013 -- Non-qualified 0.2489
09/23/2013 09/25/2013 09/27/2013 -- Non-qualified 0.2306
06/24/2013 06/26/2013 06/28/2013 -- Non-qualified 0.225
03/18/2013 03/20/2013 03/22/2013 -- Non-qualified 0.1993
12/24/2012 12/27/2012 12/31/2012 -- Non-qualified 0.2581
09/17/2012 09/19/2012 09/21/2012 -- Non-qualified 0.2078

 

[TwoByFour]

Mutual funds, including ETFs, are required by the IRS to issue non-qualified dividends for stocks the fund holds for less than 60 days prior to the ex-div date (it is a little more complicated than that). So yes, you may receive non-qualified dividends from an ETF.

If the ETF is growing rapidly the fund will be buying lots more shares to build new creation units. Some of those holdings will be short-term when a dividend is issued by the stock. That will be passed on to all ETF holders as a NQ dividend.

 

[ERD50]

....

Because of the constraints, ETFs (or MFs) must buy the bad along with the good, and have a relatively static composition. The bad stocks limit performance, they can't buy more of the good stocks and they cannot react quickly to changing market conditions, like we are seeing now. IMO, this is why none of the funds can match the performance of solid, well-bought individual stocks.

I'll just add to this, that this isn't unique to dividend paying stocks. People say the same thing about the broad-based index funds. Just buy the 'good stocks', and you will out-perform the benchmark.

Where is the list of these winners, picked forward-looking?

-ERD50

 

[TwoByFour]

I'll just add to this, that this isn't unique to dividend paying stocks. People say the same thing about the broad-based index funds. Just buy the 'good stocks', and you will out-perform the benchmark.

Where is the list of these winners, picked forward-looking?

-ERD50

I completely agree with you but when I give the above argument to my stock picking friends, they say that they can pick winners through research. One of those friends has indeed done well, out performing the market (and me) by a huge margin, but it is hard for me to know whether that is luck or skill.

 

[bingybear]

I hold SCHD, SDY and some others. SDY is a different beast in that it re-balances the aristocrat index so you have more capital gains distribution that SCHD would have. It also has a higher expense ratio.

But to your original question, hold stocks or buy the ETF? Most likely hold the ETF if it owns the stocks that you want.

But if you want to hold a different portfolio or shift it with market cycle, then hold the individual stocks. If you want to work a dividend growth play, again individual stocks.

If you wanted to hold the individual stocks of SCHD, you would have to buy then and pay commissions on both sides. You'll likely lose in the trading costs with SCHD.

 

[TwoByFour]

Individual stocks are a lot of work. Rebalancing is a pain since you have to fiddle with all of your stocks, or decide which one to focus on. With an ETF, you just buy (or sell) the fund to rebalance. Same with making a withdrawal. I am lazy so I gave up on stocks long ago.

 

[Bruceski44]

And yet, I have not seen anyone present a testable approach to this. There ought to be some record of stock picks for each year, based on some objective criteria, going back a decade or more. We could analyze those criteria.


-ERD50

There is no proof that will satisfy you. We've already been through that here: http://www.early-retirement.org/forums/f28/dividend-paying-stocks-90316.html
Sometimes common sense must be utilized in the absence of data. Do you refute any of the specific limitations pertinent to funds which I reference? Do you deny that they only apply to funds and not individual stocks?

There is no persuading a zealot. I'm a zealot, you're a zealot. I posted not to pick another debate with you, but for those seeking new information to have something to consider. I stand by my post as you have not shaken my belief.

 

[ERD50]

There is no proof that will satisfy you. We've already been through that here: http://www.early-retirement.org/forums/f28/dividend-paying-stocks-90316.html
Sometimes common sense must be utilized in the absence of data. Do you refute any of the specific limitations pertinent to funds which I reference? Do you deny that they only apply to funds and not individual stocks?

There is no persuading a zealot. I'm a zealot, you're a zealot. I posted not to pick another debate with you, but for those seeking new information to have something to consider. I stand by my post as you have not shaken my belief.

I'm not a zealot. I'm looking at data and facts, not hanging on to an opinion (OK, I'm a zealot about evidence based information).

I gotta run, will address other comments later.

-ERD50

 

[braumeister]

Not according to the link I found. Is it wrong?

https://ycharts.com/companies/SCHD/dividend

-ERD50

I would never argue about it. Just going by the fact that 100% of my SCHD dividends for the last few years has been qualified.

 

[Bruceski44]

I subscribed to M*Star's dividend investing portfolio service for one year to see what I could learn. The stocks held in the portfolio may have been good buys when the portfolio was launched, but I would not choose to buy many of them today. They are stuck with them, although they can add or subtract some small positions periodically. The stock market is not stationary and neither is any company's performance. This just reiterates to me that any static or semi-static allocation cannot achieve alpha. It's a moving target and rewards agility. Individual investors can be agile. Funds not so much.