Income Portfolio

[ERD50]

People keep asking for Data. Here is some data. I think the right comparison is 100% stocks for the dividend growth investor vs. 60/40 for the "total return" investor. ..

Some people think that, but the data says otherwise.

Those 100% div paying portfolios are *not* less volatile than VTI, so it isn't a fair comparison at all to weigh VTI down with bonds, and not the div payers. To make it apples/apples, you need to match up the volatility as best we can, then compare returns.

So your data clearly shows VTI to be the winner over those 5 and 10 year time frames.

-ERD50

 

[ERD50]

So what if I'm new here?
What about my posts are not relevant to the OP?
Just because most are set and forget types precludes discussion about dividend investing? If you don't agree, just say so. ...

Being new is fine. Maybe we can learn something we have missed before, I'm open to it, seeking it actually.

...
Just because most are set and forget types precludes discussion about dividend investing? If you don't agree, just say so. ...

Not IMO, a discussion is fine. But the discussion should include (wait for it....), some relevant data.


-ERD50

 

[qwerty3656]

Some people think that, but the data says otherwise.

Those 100% div paying portfolios are *not* less volatile than VTI, so it isn't a fair comparison at all to weigh VTI down with bonds, and not the div payers. To make it apples/apples, you need to match up the volatility as best we can, then compare returns.

So your data clearly shows VTI to be the winner over those 5 and 10 year time frames.

-ERD50

You would need to be able to determine volatility of income. My stock portfolio dropped >50%, but my income didn't budge

 

[Mulligan]

No expert, but I've always hated preferred stocks. The issuer has all the control. If interest rates go up, you are stuck as there is no fixed term like a bond that would help limit your downside risk. If interest rates go down, they can call and either re-issue or issue some bonds.



If the company gets in money trouble, preferred holders are in line after bond holders so preferred carries more default risk than bonds.



The fact that some of these are paying a lot and not being called, seems likely to be due to poor creditworthiness of the company. It's not like the corporate CFOs went to sleep and or said "let's not call these, we like paying more for money than we have to!"



So I think some of these are just junkier versions of junk bonds and buyers should be skeptical if the yield is terrific.

There is one preferred you would like but sadly not enough to get. BACRP. It was issued in early 1980s by Bank of America (actually a predecessor) as a 7% cumulative, noncallable, but owner can tender it back anytime they want at par $100. I snagged a 100 of them at $105 last month. I will never tender those.

 

[ERD50]

You would need to be able to determine volatility of income. My stock portfolio dropped >50%, but my income didn't budge

That's a mirage. Even DW (not interested in financial matters) now understands that money is a mushroom, or something like that ("fungible").

My data will show that, when I get it posted, hopefully soon, unless I get distracted.

-ERD50

 

[Exchme]

People keep asking for Data. Here is some data. I think the right comparison is 100% stocks for the dividend growth investor vs. 60/40 for the "total return" investor. I am 100% invested in dividend growth stocks and in the crash last year and the crash in 2009, my dividends hardly moved at all.

VYM (Vanguard High Dividend Yield Index)
10 yr: 12.04
5 yr: 11.40

SCHD (Schwab U.S. Dividend Equity ETF)
10 yr: NA
5 yr: 16.85

VTI (total Market)
10 Yr: 14.03
5 Yr: 17.68

AGG (Bonds)
10 Yr: 3.30
5 Yr: 3.12

60/40 VTI/AGG
10 Yr: 9.74
5 Yr: 11.86

Taking 4% withdrawal every year, a 93% VTI /7% BND gives the same standard deviation and lower maximum drawdown since 2007 (the life of the VYM data) as 100% VYM per Portfolio Visualizer.

Until the last couple of years, the 93% VTI/7% bond chart was practically an overlay of 100% VYM. In the last couple years, 93% VTI pulled away, so it ends with better Sharpe and Sortino Ratios and a higher final value. Other indices and other time frames may give a little different picture, but the main point is that dividend stocks were not very bond-like, they were very stock-like.

People need to understand that their portfolio risk may be much higher than they think if they have talked themselves into believing that dividend stocks behave like bonds.

 

[ERD50]

I've posted it many times, I will repeat it for you when I have time a little later, unless you search and find it before then.

-ERD50

You would need to be able to determine volatility of income. My stock portfolio dropped >50%, but my income didn't budge

That's a mirage. Even DW (not interested in financial matters) now understands that money is a mushroom, or something like that ("fungible").

My data will show that, when I get it posted, hopefully soon, unless I get distracted.

-ERD50

OK, putting together the data...

First, I covered some of this in this post, back in Feb, 2021:

https://www.early-retirement.org/fo...not-or-something-else-107840.html#post2559319

Updated links, the first is VTI (Total US Market) versus a blend of 7 div-paying funds. Asset allocation of 100%, and an annual, inflation adjusted withdrawal of 3.5% (there's your income) :

Note: The time period was constrained by the available data for iShares International Select Div ETF (IDV) [Jul 2007 - Apr 2021].

https://bit.ly/3wvS11f

The portfolio of VTI went from $1,000,000 initial investment to $2,224,170.
The portfolio of div-payers ended up at $1,630,526.

So the div-paying funds are down $593,644, after both portfolios provided an inflation adjusted 3.5% WR. And the VTI portfolio would have saved you some taxes to boot.

Look at that link. At the Feb 2009 trough, VTI held up better than the div payers. And again in the Jan-March 2020 drop, VTI held up better percentage-wise. And as you can see, VTI was already up considerably, so having a less deep correction is icing on the cake. All while providing 3.5% inflation adjusted withdrawals (income).

Now, to dig a bit deeper, you might notice that despite almost always leading the div payers, VTI is shown to have a slightly higher standard deviation (being higher means it can fall further, but still be ahead). So OK, to be picky let's factor that out by adding 10% bonds to VTI, which lowers standard dev - of course VTI is still way ahead (by $521,082), while providing the same income.

https://bit.ly/3oOGyaI

Portfolio 1 (Blue) is VTI:

 

[RxMan]

Source: Morningstar/Hartford Funds, 02/2020. S&P 500 Index is a market capitalisation weighted price index composed of 500 widely held shares. *Total return for the S&P 500 Index was negative for the 2000s. Dividends provided a 1.8% annualised return over the decade.

Interesting to note that the lower the total returns are by decade the greater the importance of dividends on total return. This could be especially important for retirees if there is a repeat of the 2000s decade where there wasn’t a positive return.

The best information I’ve come across regarding dividends and their impact on total returns is here:

https://www.hartfordfunds.com/dam/en/docs/pub/whitepapers/WP106.pdf

There is some comparisons of dividend paying stocks verses the S&P 500 weighted index regarding total returns and beta. (See Figure 7 on Page 6 of this report)

I thought this information was relevant to this discussion.

 

[Out-to-Lunch]

Obvious things to me:
"Dividends" do seem to trigger some emotive replies here. Not sure why.

I agree 100%. There seems to be a cadre of people that have an emotional attachment to dividend-paying stocks. I am not sure why. I am glad that someone else has noticed this!

 

[qwerty3656]

The examples given are how holding total market plus 7-10% bonds blows away dividend growth investing. Nobody holds 7-10% bonds [after they retire].

 

[olyveoil]

So.
VTI beats Dividend paying funds in a large/long bull market.
Great.

Again.......I am not an either/or investor. I think both have a place in my portfolio. I am accumulating for the long term future with income, dividend payers and growth/total market.

The OP seems to be doing the same. If he/she wishes to get advice/see options I will gladly oblige.

 

[target2019]

Source: Morningstar/Hartford Funds, 02/2020. S&P 500 Index is a market capitalisation weighted price index composed of 500 widely held shares. *Total return for the S&P 500 Index was negative for the 2000s. Dividends provided a 1.8% annualised return over the decade.

Interesting to note that the lower the total returns are by decade the greater the importance of dividends on total return. This could be especially important for retirees if there is a repeat of the 2000s decade where there wasn’t a positive return.

The best information I’ve come across regarding dividends and their impact on total returns is here:

https://www.hartfordfunds.com/dam/en/docs/pub/whitepapers/WP106.pdf

There is some comparisons of dividend paying stocks verses the S&P 500 weighted index regarding total returns and beta. (See Figure 7 on Page 6 of this report)

I thought this information was relevant to this discussion.

Thanks for posting this. Another point was interesting.

The second-quintile stocks outperformed the S&P 500 Index seven out of the ten
time periods (1930 to 2020), or 77.8% of the time, while first- and third-quintile stocks
tied for second, beating the Index 66.7% of the time. Fourth- and fifth-quintile stocks
lagged behind by a significant margin.

If I'm remembering correctly, the second quinitile has payout ratio less than 50%. There's more certainty that the dividend will continue for those companies.

 

[ERD50]

The examples given are how holding total market plus 7-10% bonds blows away dividend growth investing. Nobody holds 7-10% bonds [after they retire].

Nobody? There's several posters here who are 100% equities, so clearly there would be more that are at 90/10 and above (or less, ref to bonds). You can probably find a poll on that here.

Seems like an odd (in addition to unfounded) response to the data.

OK, so 60/40 to 70/30 is probably more common here, and for retirees in general - you could make that change and report the data here. I'm confident that the dividend paying sector will lag.

....

The best information I’ve come across regarding dividends and their impact on total returns is here:

https://www.hartfordfunds.com/dam/en/docs/pub/whitepapers/WP106.pdf

There is some comparisons of dividend paying stocks verses the S&P 500 weighted index regarding total returns and beta. (See Figure 7 on Page 6 of this report)

I thought this information was relevant to this discussion.

Caveat, I'm on my 1st cup of coffee, and I kind of skimmed the article, but WADR, I'm not sure (emphasis on *not* sure) it is relevant.

Figure 7 is interesting, and it does show some added performance for some of those dividend payer groups. But it seems they looked at the past 12 months of dividend performance to determine the groupings for the following 12 months. So does this mean an investor would need to review the dividend performance of all the S&P 500 stocks annually, and buy/sell to adjust their portfolio every year based on the past 12 months action? That sounds like a fair amount of work, with potential tax consequences.

What I do think is relevant is, if there is an advantage to div payers, why doesn't it show up in the charts of the div paying sector funds? That is really the only practical way for a retiree to easily obtain a decent level of diversification (though still less diversified than SPY or VTI). And those lag, quite significantly.

-ERD50

 

[ERD50]

So.
VTI beats Dividend paying funds in a large/long bull market.
Great. ...

The data says more than that, and I pointed it out.

The time frame is limited by the availability of data for these div-paying sector funds. They haven't been around long enough to get more data. I can't do anything about that.

And did you notice that the div payers under performed in the dips in that time frame? I don't think that bodes well for how they would do in other down turns. From that post:

Look at that link. At the Feb 2009 trough, VTI held up better than the div payers. And again in the Jan-March 2020 drop, VTI held up better percentage-wise. And as you can see, VTI was already up considerably, so having a less deep correction is icing on the cake. All while providing 3.5% inflation adjusted withdrawals (income).

...
Again.......I am not an either/or investor. I think both have a place in my portfolio. I am accumulating for the long term future with income, dividend payers and growth/total market. ...

And I do exactly that - by buying VTI I get the div payers, the growth and total market. For the lowest effort, best tax scenario, greatest diversification and lowest fees - all in one-stop shopping. That's hard to beat, a win-win-win-win-win (as the data shows).

-ERD50

 

[qwerty3656]

ERD50 - you have no interest in having a conversation about this - you are obsessed with proving the other guy wrong. I considered multiple investment options for the drawdown of my retirement assets. One was a 60/40 total market split, one was a 100% dividend growth split (which seems to have a similar return profile as the 60/40 split).

I get that you think the 60/40 split is less risky, but what I don't get is how you need to belittle anyone who takes a different view (e.g. that the future may be different than the past or that the dividend growth portfolio is just easier to manage, etc).

There is more than 1 answer here

 

[ERD50]

ERD50 - you have no interest in having a conversation about this - you are obsessed with proving the other guy wrong. I considered multiple investment options for the drawdown of my retirement assets. One was a 60/40 total market split, one was a 100% dividend growth split (which seems to have a similar return profile as the 60/40 split).

I get that you think the 60/40 split is less risky, but what I don't get is how you need to belittle anyone who takes a different view (e.g. that the future may be different than the past or that the dividend growth portfolio is just easier to manage, etc).

There is more than 1 answer here

Where did I belittle anyone? I'm presenting data, it is what it is. How is that *not* a "conversation"?

But you are wrong. Don't argue with me, argue with the data. I think the expression is "Don't shoot the messenger"?

You say:

One was a 60/40 total market split, one was a 100% dividend growth split (which seems to have a similar return profile as the 60/40 split).

So I ran VTI/Bonds 60/40 against the div-paying sector funds. Once again, the data shows that VTI/bonds outperforms 100% div sector funds/ETFs both in the long run and in the dips and in every metric (higher return, lower standard dev., less dip in a bad year). It is not similar.

See for yourself (blue line is VTI/bonds 60/40, red line is 7 div-paying sector funds/ETFs :

https://bit.ly/3fjN3il

Yes, I want to be right - I do that by reviewing the data. If the div sector looked better all around (including ease of investment), I'd be in it (but the advantage would likely get arbitraged out). If anything is wrong in my analysis, please, please point it out. I do not want to be under any false assumptions.

-ERD50

 

[Chuckanut]

I agree 100%. There seems to be a cadre of people that have an emotional attachment to dividend-paying stocks. I am not sure why. I am glad that someone else has noticed this!

I believe it has something to do with the way the money arrives. Dividends arrive reliably, on a schedule that the investor can pretty much count on over long periods of time (Granted that could change in bad times.) Capital gains are often bumpy, up 20% this year, down 12% next year, and up 4% the year after that. Many people cannot handle the uncertainty. They sleep better with dividends just as many people sleep better knowing their 'financial advisor' is watching over their investments. (Personally, that would give me nightmares. )

 

[olyveoil]

The data says more than that, and I pointed it out.

The time frame is limited by the availability of data for these div-paying sector funds. They haven't been around long enough to get more data. I can't do anything about that.

And did you notice that the div payers under performed in the dips in that time frame? I don't think that bodes well for how they would do in other down turns. From that post:


And I do exactly that - by buying VTI I get the div payers, the growth and total market. For the lowest effort, best tax scenario, greatest diversification and lowest fees - all in one-stop shopping. That's hard to beat, a win-win-win-win-win (as the data shows).

-ERD50

2007 - 2021 was an extended bull market. What else is there to know regarding the timeline? There are other dividend paying funds / etf's to choose from is there not?
What I did notice in the thread you copied were ignored counter-points.
I also noticed the post by RxMan that showed dividend payers outpaced in a down decade. Trying to think what dips there really were between 2007 and 2021 (2008 and subsequent recovery and the less than 6 month Corona virus dip in 2020)

What you do get with VTI and other dividend paying funds are more unknown dividend payments. Keep in mind the investing purpose for dividend payments. Regular income. That is not the purpose of VTI, nor of the other funds.

Feel free to keep VTI ad infinitum. I hope it works out for you.
BTW, happy 20th birthday to VTI earlier this week.

I happen to prescribe to bucketing. low risk income / dividend paying income / total return-growth. Want me to pick a good 12 year period to show 15%/25%/60% portfolio outperforming VTI where I can "only" choose certain time frames?

 

[Exchme]

The examples given are how holding total market plus 7-10% bonds blows away dividend growth investing. Nobody holds 7-10% bonds [after they retire].

Exactly.

Now I'm all for higher stock percentages than many people use. If dividend investing is effective as a mental trick for someone to hold a higher percentage stocks, it might work out really well for them. But they need to understand the risk characteristics of what they own, so they are not surprised in a downturn.

Maybe I misunderstood them, but some other people on this thread sounded like they thought a portfolio full of dividend stocks had risk characteristics similar to 60% VTI/40% bonds and that just doesn't hold up when looking at the data. High dividend stocks have only been slightly more resistant to downturns than VTI. Also, as you say, VTI has blown dividend shopping away, so there has been an empirical disadvantage to people generating cash via dividend distributions compared to managing for total returns and just selling as needed.

 

[olyveoil]

Exactly.

Now I'm all for higher stock percentages than many people use. If dividend investing is effective as a mental trick for someone to hold a higher percentage stocks, it might work out really well for them. But they need to understand the risk characteristics of what they own, so they are not surprised in a downturn.

Maybe I misunderstood them, but some other people on this thread sounded like they thought a portfolio full of dividend stocks had risk characteristics similar to 60% VTI/40% bonds and that just doesn't hold up when looking at the data. High dividend stocks have only been slightly more resistant to downturns than VTI. Also, as you say, VTI has blown dividend shopping away, so there has been an empirical disadvantage to people generating cash via dividend distributions compared to managing for total returns and just selling as needed.

1970's and 2000's were not that long ago.

 

[qwerty3656]

See for yourself (blue line is VTI/bonds 60/40, red line is 7 div-paying sector funds/ETFs :

https://bit.ly/3fjN3il



-ERD50

Take that same link and change the start year to 2009. You can create what ever answer you want.

I personally don't think Bonds or the NASDAQ are going to perform nearly as well over then next 10 years as they have over the last 10 years.

But I don't think I'm taking a big risk either way.

 

[OldShooter]

ERD50 - you have no interest in having a conversation about this - you are obsessed with proving the other guy wrong. ...

... But you are wrong. Don't argue with me, argue with the data. ...

Quite funny actually. I have a leg in each camp. ERD50 can be quite excitable when the facts that he is offering are rejected by people who just don't want to listen.

There is really just one fact here: History predicts that a diversified equity tranche built with emphasis on dividends will underperform a broader diversified tranche that does not consider dividends as a selection criterion.

This is really not hard to understand. Selecting for dividends rejects: growth stocks which do not pay dividends, issuers who return profits to shareholders via stock buybacks, small stocks which rarely pay dividends, and value stocks, many of which do not pay dividends. This pretty much leaves old-line companies whose businesses do not offer attractive options for profit investment. But buy this napkin analysis or not, ERD50's fact is still a historical fact.

(There is a related fact that for most taxpayers, dividends are factually less tax-efficient than share buybacks. This seems to be increasingly understood but is probably out of scope for this thread.)

...anyone who takes a different view (e.g. that the future may be different than the past or that the dividend growth portfolio is just easier to manage, etc). ...

Nothing wrong with any of that. Inductive reasoning is the best option we have, but no one can predict the future. There is an infinity of futures you can pick from. If your anticipated future includes massive growth in fish monger stocks, then that is where you will want to go. If you perceive a dividend portfolio as being easier to manage, then go for it. ERD50's point is that this will probably cost you in total return. Hopefully you realize that when you make your decision.

Other portfolio decisions, including fiddling AA, are out of scope versus the main point: History predicts that a diversified equity tranche built with emphasis on dividends will underperform a broader diversified tranche that does not consider dividends as a selection criterion.

You don't want to believe this, fine. But it is the relevant fact here.

 

[ERD50]

2007 - 2021 was an extended bull market. What else is there to know regarding the timeline? There are other dividend paying funds / etf's to choose from is there not? ...

I didn't choose that time-frame. It was based on looking for div-paying funds/ETFs that had some history. Those were the seven that I found with the longest history, and that dictated the time-frame.

Please find some others for me with an equal or greater history, I'd be interested in adding them to the list.

And I've already pointed out (twice now) what else is there to know regarding the timeline - there were dips, and those div sectors under-performed. The div folks keep telling me that the div sector holds up in dips. How come we don't see it?

...
What I did notice in the thread you copied were ignored counter-points.
I also noticed the post by RxMan that showed dividend payers outpaced in a down decade. ....

Please point out any counter-points I missed. I did see one, but then noticed that someone else responded. They covered it as well/better than I would have, so it was answered, no need for me to replicate it.

And as I mentioned, it appears that it would take a *lot* of effort (and probably taxes from trading) to duplicate that study. If it was easy, why don't these div sector funds show this performance boost? That is where the rubber meets the road.

... What you do get with VTI and other dividend paying funds are more unknown dividend payments. Keep in mind the investing purpose for dividend payments. Regular income. That is not the purpose of VTI, nor of the other funds.
...

I don't see the point. Money is fungible. As long as my portfolio is returning value, it makes no difference (other than taxes, which favor a non-zero cost basis sale) if it is from divs or a combination of divs and growth (like VTI).

All I need for a steady income from VTI is to look at my divs once a year, and sell off enough to make up any delta between my annual expenses and those divs. Easy-peasy.

Dividend income is no simpler to deal with, and maybe more complex. If you spend less than divs, you need to go re-invest it. If you spend more than divs, you still need to do a sale. Sure, you could let the excess sit in cash until you need it, but that's gonna be a drag on performance. Seems highly unlikely that one's personal spending habits match exactly the div payouts, unless you want to let someone else dictate what you spend. No thanks.

... Want me to pick a good 12 year period to show 15%/25%/60% portfolio outperforming VTI where I can "only" choose certain time frames?

Take that same link and change the start year to 2009. You can create what ever answer you want. ....

Not interested in cherry-picked time frames. I could easily counter with cherry-picked times showing the opposite. No value to it. No thanks. Again, find some high-div sector funds with a longer history, I might have missed some. I'll be glad to take a look.

... I personally don't think Bonds or the NASDAQ are going to perform nearly as well over then next 10 years as they have over the last 10 years.

But I don't think I'm taking a big risk either way.

Could very well be. But I see no reason to think that the div sector would do better than the equivalent risk Total-Market/Bond portfolio. Do you?

I never said you are taking a big risk. I demonstrated with data that these div paying sector funds do not deliver what the fans of them claim. They under-perform over the long run, they don't hold up better in the dips in their history, and they are less tax efficient.

But there certainly is risk to having $500,000 less in your portfolio that started with $1M in 2007, and that's where the div-sector investor would be. An extra 1/2 Million covers a lot of any future relative under-performance (if that even happens)

-ERD50

 

[Bruno]

My thanks to every ones input with extra kudos going to ERD50 for his detailed analysis. For those who are curious as to my final decision, I decided to invest 49% in monthly dividend ETFs (PGX and SPHD) and 49% in a total return ETF (VTI). The remaining 2% will be in cash to provide a cushion for monthly disbursements.

Please let us know how it works out. I have a good chunk in SPHD and its paying about 4% each month. SPHD lost about 25% a while back and the monthly dividend just kept coming.

 

[olyveoil]

I didn't choose that time-frame. It was based on looking for div-paying funds/ETFs that had some history. Those were the seven that I found with the longest history, and that dictated the time-frame.

-ERD50

Of course you chose the time frame. Absurd to suggest you didn't. How did the charts get on this forum if you didn't pick the input data?