Vanguard High Dividend Yield or Total Stock Market

[ziggy29]

I noticed next to the "Style" box there's "YTD return" that shows Total = 14.03% vs. High Dividend = 10.73% and holdings turnover is 3% vs 13%. Does that mean High Dividend is very volatile ? And it does look like Total will win in the long run compared to High dividend. I originally was looking at this like this : "OK the High dividend pays so much more then in return it buys way more shares than Total so we will be better off".

Also for those that mentioned dividend can be paid out to an account - how do you withdraw from it ? I thought you cannot withdraw from non-taxable account without a penalty before age 59.5 ? ( I did read about using Roth ladder to convert principal but not capital gain)

I don't know that dividend stocks are (on average) any more volatile, as long as they are paying sustainable dividend levels. If the returns do not include reinvested dividends, they are comparing apples and oranges.

And as for the difference in returns, I'd add a couple of caveats here. First, "YTD" (in early April, no less) is not a sufficient performance metric to draw any long term conclusions. Look also for 1- 3-, 5- and 10-year returns and make sure they include *reinvested dividends*.

That leads me to my second caveat -- in performance metrics, make sure they are not looking ONLY at share price but also reinvested dividends and capital gains.

I would expect lower turnover in the total market because it is an index fund.

 

[foxfirev5]

EDIT : thanks for those who suggested splitting, but do you think it's OK for us to plow all 200k into Total ? I'm not very interested in High dividend now that I see long term (20 years) Total should make us happy[/QUOTE]

While I own both I see no real advantage in the long run. Even though I am living off dividends VTSAX total market is my largest holding. The VTSAX is held in a Roth account and the dividend producers are in my tIRA. At this point the dividends are a simple way of mindlessly producing income. In effect I'm both a TR and Income investor. The Roth is for long term growth, longevity insurance and inheritance. The tIRA holdings are low or no growth income producers. Forever hedging my bets. I do not recommend my approach but it works for me.

 

[ziggy29]

Would also add that if I had both retirement accounts and taxable accounts, I'd put the dividend stocks/funds/ETFs in the taxable account IF I were in the 12% bracket or less, which makes qualified stock dividends tax-free. Dividends received in an tIRA get taxed as ordinary income when withdrawn.

 

[RunningBum]

Also for those that mentioned dividend can be paid out to an account - how do you withdraw from it ? I thought you cannot withdraw from non-taxable account without a penalty before age 59.5 ? ( I did read about using Roth ladder to convert principal but not capital gain)

People who are living off the dividends are either able to withdraw without penalty from their tax deferred account (usually means they are over 59.5), or they are holding those funds in a taxable account. I don't think anyone is saying that someone young should direct dividends from a tIRA to a taxable account; as you say, they would be penalties and taxes.

 

[foxfirev5]

Ziggy,Good points about the taxable accounts. Everyone needs to understand their own situation. At times I wish I had saved more in taxable for flexibility. However looking back it appears it was nothing more than a pay me now or pay me later situation with the tIRA's. I lieu of the taxable I am grateful I maxed out Roths from their inception. The Roth contributions plus conversions in later years have certainly provided the ultimate in flexibility with no concern about taxes at all.

 

[Oz investor]

Thank you everyone for all the insightful ideas and advice.

As you can tell I tried to read and understand finance and funds but I'm just not very good at it compared to you guys. So thankfully many of you pointed out other things to look at which I have no idea. e.g., the "Style" box and the more diversified amount of funds with Total Stock Market.

I noticed next to the "Style" box there's "YTD return" that shows Total = 14.03% vs. High Dividend = 10.73% and holdings turnover is 3% vs 13%. Does that mean High Dividend is very volatile ? And it does look like Total will win in the long run compared to High dividend. I originally was looking at this like this : "OK the High dividend pays so much more then in return it buys way more shares than Total so we will be better off".

Also for those that mentioned dividend can be paid out to an account - how do you withdraw from it ? I thought you cannot withdraw from non-taxable account without a penalty before age 59.5 ? ( I did read about using Roth ladder to convert principal but not capital gain)

EDIT : thanks for those who suggested splitting, but do you think it's OK for us to plow all 200k into Total ? I'm not very interested in High dividend now that I see long term (20 years) Total should make us happy

the wisdom members have is a learned skill .. as soon as you realize how much difference those small variances can make to your outcome you will be inspired to learn as well ( just remember to think as you learn )

if investing was easy 10% of the forum members would quadrillionaires ( some of them prefer to enjoy their retirement , not just live stress-free )

( i live in Australia and chose to invest outside any formal retirement plan structure .. i could if i wished liquidate everything except the property holdings next week and donate it to charity possibly earning a tax refund to boot , not donating it will incur extra taxes , obviously )

as far as i am concerned all these rules and regulations contribute NO security to your retirement ( what is legal now can all be changed with the squiggle of a pen ... watch Australia and learn what can happen to you )


total return v. dividend yield .. is really a personal preference

if you are planning to withdraw say 4% ( a year ) to fund your retirement Total Return is very important ( especially if it doesn't increase every year )

i am planning to fund my retirement solely on income ( unless extreme emergencies ) so share price growth is nice ( to brag about at parties ) but enough income to pay the bills ( any extra income is liable to be invested in more equities helping to resist inflation )

good luck

PS Australian tax laws are kinder to dividend income , than realized capital gains , the reverse of the US

 

[RunningBum]

i am planning to fund my retirement solely on income ( unless extreme emergencies ) so share price growth is nice ( to brag about at parties )

No, it's not for bragging rights, it's because it's a good indication of the reliability of your dividends to continue.

 

[target2019]

EDIT : thanks for those who suggested splitting, but do you think it's OK for us to plow all 200k into Total ? I'm not very interested in High dividend now that I see long term (20 years) Total should make us happy

While I own both I see no real advantage in the long run. Even though I am living off dividends VTSAX total market is my largest holding. The VTSAX is held in a Roth account and the dividend producers are in my tIRA. At this point the dividends are a simple way of mindlessly producing income. In effect I'm both a TR and Income investor. The Roth is for long term growth, longevity insurance and inheritance. The tIRA holdings are low or no growth income producers. Forever hedging my bets. I do not recommend my approach but it works for me.[/QUOTE]
I think the mechanics of how dividends could fill a bucket are of interest to some. But, as you say, over very long periods, it is probably of little difference.

It is all conjecture, and we don't know which, if either, will outperform for the NEXT 10 years. I have VTSAX and SCHD (Schwab value), so I straddle the fence on this controversial topic.

 

[audreyh1]

I think you can compare VIG and VYM over the long term and see that the higher yielding dividend ETF has somewhat lower total return. This is to be expected because higher dividend yield companies tend to be slower growth mature companies. And both trail VTSAX. So there is a trade off. There is a reason for the differences in total return.

 

[frank2009]

Here is a Vanguard paper that advocates total return investing as opposed to dividend focused investing. The paper discusses bond and equity dividend fund risks.

https://personal.vanguard.com/pdf/s352.pdf

 

[OldShooter]

... I noticed next to the "Style" box there's "YTD return" that shows Total = 14.03% vs. High Dividend = 10.73% and holdings turnover is 3% vs 13%. Does that mean High Dividend is very volatile ? And it does look like Total will win in the long run compared to High dividend. ...

As you have found, we're happy to help.

A little more tutorial: YTD numbers are meaningless. 1 year numbers are meaningless. Only when you get to 5 years or, better, 10 years, can you start to compare investments. All investments and all sectors wax and wane unpredictably over long time periods. For example, US stocks have been strong in the last decade or so. Before that it was International stocks.

My rule: Investing is boring. If you're not bored, you are doing it wrong.

Warren Buffet on the same subject: “The stock market is a device for transferring money from the impatient to the patient.”

Not trying to be funny, I suggest that you just buy the more diversified of the funds, then don't watch it. Check back in five or ten years. If history is any guide, you will be a happy guy.

 

[ExFlyBoy5]

Some people who live off dividends say they don't really care whether the stock grows, they just want their dividends, but a struggling stock may cut the dividends. IBM used to be known as a "widow's stock" for it's reliable dividends. Then in 1992 it cut the quarterly dividend from 1.21 to .54 and 2 quarters later to .25 as the stock plummeted. It wasn't until 2006 before the dividend recovered to 1.20, split adjusted. So it recovered, but that's 14 years where you would have had to live off about 21% of your dividend distribution had you been relying on Big Blue. Another case, last year GE cut its dividend to a penny/quarter.

I would like to highlight these two stocks as EXCELLENT examples of how a "great" dividend stock can turn into one helluva stinker. My Dad who lived to the ripe age of 91 had a very large amount of both IBM and GE stock. He held them for a very, VERY long time and made a lot of money from the dividends. BUT...in the last few years of his life, they really turned to dung and thankfully, he had a well diversified portfolio, so he didn't have to rely on the dividends from those stocks. If he *did* have to rely on them, he would have been in a world of hurt...so...dividend stocks should be approached with caution. MY OPINION ONLY, of course.

 

[OldShooter]

... he had a well diversified portfolio, so he didn't have to rely on the dividends from those stocks. If he *did* have to rely on them, he would have been in a world of hurt...so...dividend stocks should be approached with caution. MY OPINION ONLY, of course.

I think the lesson there is actually that a non-diversified portfolio of individual stocks should be approached with caution and with the understanding that a diversified portfolio requires at least 50-100 stocks carefully diversified across sectors. Discussion here: https://www.investopedia.com/articles/stocks/11/illusion-of-diversification.asp

Then, deductive reasoning leads us IMO to the conclusion that it is almost impossible for an individual investor to build and maintain such a portfolio. Hence VTSAX or, maybe better, VTSWX.

 

[NewToEverything]

I appreciate the advice, everyone. I think I'll just invest all in Total Market and forget about it....

I do wanna learn and read more about investing and finance but with work, family life, kids activities, managing their homework, I find myself with very little minutes to read investing and finance at night when they goto bed. Just not very possible to read a lot with young kids and baby duties. I discovered ER just a year ago and have been trying to straighten up our finances to give ourselves a shot at it in the future. We haven't even touched my previous employer's 401k and my wife's 403 plans for a long time until I read about expense ratio eating up big chunks of future gain(I know I know ). So I finally read up and started the journey of rolling over , Vanguard IRA....etc.

Ziggy29 :
You said "If the returns do not include reinvested dividends, they are comparing apples and oranges."

- How do I see returns with reinvested dividends ?

 

[gwraigty]

I appreciate the advice, everyone. I think I'll just invest all in Total Market and forget about it....

I do wanna learn and read more about investing and finance but with work, family life, kids activities, managing their homework, I find myself with very little minutes to read investing and finance at night when they goto bed. Just not very possible to read a lot with young kids and baby duties. I discovered ER just a year ago and have been trying to straighten up our finances to give ourselves a shot at it in the future. We haven't even touched my previous employer's 401k and my wife's 403 plans for a long time until I read about expense ratio eating up big chunks of future gain(I know I know ). So I finally read up and started the journey of rolling over , Vanguard IRA....etc.

Ziggy29 :
You said "If the returns do not include reinvested dividends, they are comparing apples and oranges."

- How do I see returns with reinvested dividends ?

Take the link posted by JoeDreamer and select Yes for Display Income and select Yes for Reinvested Dividends.

You can always do further studying as your kids get older and your time is more your own.

 

[2177V]

VHDYX (High Div Yield) and VTSAX (Total Stock Market) are both rated 5 stars by morningstar which in my opinion is the consumer's reports for investors. A $10,000 investment grew to $41,453 for VHDYX and $43,666 for VTSAX. There is nothing wrong in putting $100K in each.

Since you have an IRA, you should be aware that there is no tax penalty shifting funds around. You only get taxed when you withdraw at retirement.

I play the following "buy low sell high" game in my IRA: I put 20% of my portfolio into VFSTX (short Term Corporate bond) which is stable but the earnings are low. When the market is relatively high, I transfer some portion of my funds from my high risk but high return funds to VFSTX which is a "sell high" strategy. When the market is relatively low, I transfer funds from VFSTX to my high risk and high return funds which is a "buy low" strategy. I use the 50 days EMA (Expontential Moving Average) and the SMA (Simple Moving Average) as my buy and sell indicator.

Most people simply "buy and hold" which I called passive management. This is nothing wrong with "buy and hold". Active management of your IRA do require experience and skill. If you do it correctly, you can add one additional percentage point on your return. On the other hand, it does requires some risk playing this game. I play this game because I am not a passive person and I always lived a life of danger.

 

[targatom2019]

IMHO, 40 is too young to chase dividend unless you already retired and looking for income. I am turning 50 in couple months and never had bonds or CDs until recently because I will pull the plug in July 2019.

 

[pb4uski]

We have about 200k rolling over from previous company 401k to a Vanguard traditional IRA. Wondering is it better to buy Vanguard High Dividend Yield Index Fund or Vanguard Total Stock Market Index Fund ?

Reason is High Dividend Yield pays much higher dividend than Total Stock Market and we would like to tell the fund to reinvest the dividend so to accelerate the portfolio. Basically let it "do its thing" automatically.

Also how does reinvest dividends work - is it really taking the dividend payout and just buying more shares of the same fund ? e.g., let's say dividend payout is $500, is Vanguard buying another $500 worth of whatever fund allocation in my portfolio ?

What would you do ? Seeking opinions. Thanks in advance.

Edit : We are in our 40s, no plan on touching IRA or living off of its dividends.

+1 If I was 40 yo I would go with Total Stock.... 8.11% vs 7.36% since Jan 2007 with dividends reinvested. High Dividend Yield will give you a slightly smoother ride.

And yes if you reinvest dividends they will take your dividend and buy more shares.

See https://www.portfoliovisualizer.com...cation1_1=100&symbol2=VTSMX&allocation2_2=100

 

[pb4uski]

Well, ... Remember that "risk" in this context is not really risk, it is volatility. For the OP with a long time horizon, it is really not risk at all.

Further, for these funds holding large numbers of stocks, individual stock risk has been diversified away and the only thing left is market risk which cannot be diversified away except by adding things other than stocks to the portfolio. I am too lazy to crank up Portfolio Visualizer, but I'll bet the SDs/Sharpe Ratios, etc. are very very similar. So, again IMO a non-issue for the OP.

Agree totally on total return being the only measurement that matters. That is settled science.

SD are 15.17% for VTSMX and 14.11% for VHDYX... Sharpe Ratios are 0.54 and 0.52, respectively, correlation is 1.00 and 0.95, respectively so yes, risk/volatility are very similar.

Total returns are 8.11% vs 7.36%, respectively. I like 8.11% better than 7.36%.

 

[pb4uski]

.... BTW why is it bad to live off dividends ?

Nothing wrong with living off solely dividends if you don't mind working longer. But this is an early retirement forum.

All else being equal, if you live only off of dividends rather than total return you need more to retire with the same level of risk of ruin.... since you need more to retire, you need to work/save longer.

 

[OldShooter]

SD are 15.17% for VTSMX and 14.11% for VHDYX... Sharpe Ratios are 0.54 and 0.52, respectively, correlation is 1.00 and 0.95, respectively so yes, risk/volatility are very similar.

Thank you ... for enabling my continuing laziness. (I will continue to argue, though, that risk and volatility are not the same except to some academics.)

Total returns are 8.11% vs 7.36%, respectively. I like 8.11% better than 7.36%.

Or course. The important takeaway here (not often discussed) is that a portfolio that is optimized for dividends will be suboptimal for total return.

In the maybe 30 year horizon of the OP, 8.11% delivers 104% total growth and 7.36% delivers only 84%.

 

[pb4uski]

..... In the maybe 30 year horizon of the OP, 8.11% delivers 104% total growth and 7.36% delivers only 84%.

So he hits his number faster with total stock.

 

[OldShooter]

... both rated 5 stars by morningstar which in my opinion is the consumer's reports for investors. ...

Be sure you understand what those stars mean. And, actually, it's not much.

Morningstar bins funds into classes like large cap, small cap, etc. In each class the funds are given stars based on past performance relative to other class members. In each class, stars are awarded. IIRC the top 10% get five stars. Note that this is independent of the performance of the class. A poorly-performing class might result in a 5-star rating for a fund that actually didn't perform as well as a two- or three-star fund in an outperforming class. So (1) they are historical, not predictive, and (2) they do not necessarily identify good investments, even in the rear view mirror.

For years, Morningstar has let the investing public believe, with a wink and an nod, that the star ratings are predictive. They have made a lot of money as a result. In recent years, however, they have started developing systems that they believe will be predictive. (IMO they will fail; no one has ever succeeded at this broadly or over a long haul.)

Last fall there was a WSJ study that announced that the star ratings have been found to be not predictive. Basically demonstrating a firm grasp of the obvious IMO. In reaction, Morningstar came back and effectively said: "We never said they were." This stirred up more discussion. Probably a Google search will find you plenty of reading material.

 

[NewToEverything]

haven't had a chance to catch up lately due to busy baby and kids schedule.

We haven't pulled the trigger yet. The money is still safely sitting at the Vanguard settlement fund because Total is priced at $71.88 which seems high to me. (We also have a taxable account with Vanguard and we bought Total mutual funds at $66). Do you guys think it will come down to the 60s range this year(perhaps another sell-off at the market in Dec 2019 like in Dec 2018) ? What do you think ? We don't wanna buy too high

 

[RunningBum]

haven't had a chance to catch up lately due to busy baby and kids schedule.

We haven't pulled the trigger yet. The money is still safely sitting at the Vanguard settlement fund because Total is priced at $71.88 which seems high to me. (We also have a taxable account with Vanguard and we bought Total mutual funds at $66). Do you guys think it will come down to the 60s range this year(perhaps another sell-off at the market in Dec 2019 like in Dec 2018) ? What do you think ? We don't wanna buy too high

I don't try to time the market. If I have money to invest, I invest it right away, in a way to get or keep my asset allocation in line. What if it keeps going up, are you going to hold out until it returns to the 60s, which might not ever happen?