Vanguard High Dividend Yield or Total Stock Market

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NewToEverything

Dryer sheet wannabe
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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.
 
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Use the "Compare Tool" at Vanguard and peek under the covers.

See how many stocks each hold. Costs. Performance during up and down periods.

In a Traditional/Rollover IRA you can re-invest the dividends or send them to your settlement account.

If you are over 59.5 and taking withdrawals from this IRA it may make sense to send them to the settlement account and use it as part of your monthly (or quarterly or annual) withdrawal.

If you are a "total market" person, you probably want to hold the Total US stock index. Every day, those funds own "the market".

If you are a dividend chaser, the high yield dividend fund will draw you in.

Read up on Total Return investing vs Dividend investing to understand the differences.

Good luck!
 
Say you have $10K to invest. If you put it in the High Dividend fund and it goes up 5% and the dividends pay 5%, you will have $11K with automatically reinvesting the dividend.

If you put it in the Total Stock fund and it goes up 8% and the dividends pay 2%, you will also have $11K with automatically reinvesting the dividend.

So, you want to be a total return investor especially if you are leaving it to grow. Looks at both the dividend yield and the prospect for growth. High dividend stocks and funds usually grow slower than other stocks, but may be more stable and thus have lower risk. Whichever fund looks better for total return with respect to risk is the one you want to invest in.

If you are looking to live off dividends (and I don't advocate that), it's a different story, but that's not what you said you're looking for.

And yes, reinvesting dividends means they take your dividend money and automatically buy new shares at the market price. If this were in a taxable account, you would pay taxes on the dividends, and increase your basis on the fund by the amount of the repurchase. Since it's in an IRA, there is no tax consequence and nothing to report wrt the dividends and repurchase.
 
Updated post with age. We are just going to leave it there and won't be needing it.

I do trust Total Market VTSAX for long term but I was wondering if I should go with High Dividend because it pays so much more dividend(3.09% yield vs. 1.82%). And the Hypothetical growth of $10,000 return are roughly similiar (from 10k to 40k) on Vanguard's fund pages :

https://investor.vanguard.com/mutual-funds/profile/vhyax
vs.
https://investor.vanguard.com/mutual-funds/profile/vtsax

BTW why is it bad to live off dividends ?
 
VYM is ~ 3% yield.
396 holdings

VTI is ~ 1.8% yield
3500+ holdings

Yes, one pays a higher dividend, but that is not the only question to ask.
 
NewToEverything said:
Updated post with age. We are just going to leave it there and won't be needing it.

I do trust Total Market VTSAX for long term but I was wondering if I should go with High Dividend because it pays so much more dividend(3.09% yield vs. 1.82%). And the Hypothetical growth of $10,000 return are roughly similiar (from 10k to 40k) on Vanguard's fund pages :

https://investor.vanguard.com/mutual-funds/profile/vhyax
vs.
https://investor.vanguard.com/mutual-funds/profile/vtsax

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


It's not really bad to live off of dividends. Lots of people do.
 
I would go with Vanguard High Dividend Yield if I were planning to pursue a dividend yield strategy where my retirement income was based on yield generated by my portfolio.

I would go with the more diversified Vanguard Total Stock market index if I were planning to withdraw X% of the portfolio annually where I had a target asset allocation and rebalanced annually after withdrawal. This is also known as a total return strategy in which yield is treated no different than capital gains.
 
NewToEverything said:
Updated post with age. We are just going to leave it there and won't be needing it.

I do trust Total Market VTSAX for long term but I was wondering if I should go with High Dividend because it pays so much more dividend(3.09% yield vs. 1.82%). And the Hypothetical growth of $10,000 return are roughly similiar (from 10k to 40k) on Vanguard's fund pages :

https://investor.vanguard.com/mutual-funds/profile/vhyax
vs.
https://investor.vanguard.com/mutual-funds/profile/vtsax

BTW why is it bad to live off dividends ?
Click to expand...
VHYAX is a very new fund. There's nothing wrong with that, especially for an index fund that should not have a way to be mismanaged, but you can't make any projections about growth from it's very, very short history.

You keep pointing to the larger dividend only. I can't help you anymore if you don't realize that is only part of the picture. Not going to keep banging my head against the wall.

I never said it was bad to live off dividends. It's just not what I recommend, because I'm a total value investor. I want the largest return on growth + dividends. I think over time the total market fund will have a larger return over a high dividend fund. I could be wrong. People who live off dividends do not sell any of the principal, in my understanding. I have no problems selling a small part of a stock that (hopefully) has grown. With a 3.09% yield and not touching the principal, that is your withdrawal rate and I think you had to work longer to accumulate enough to live off 3.09% as opposed to being a total value investor and living off of a 3.5% withdrawal rate, which most agree is quite safe.

Finally, there's no guarantee a dividend will continue and grow with inflation as needed. A diversified fund probably has a decent chance, but individual stocks might not. 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.

This topic has been debated many times and I'm not going to rehash it any more than this. Someone who lives off dividends should feel free to give their side and rationale. Like I said it's not a bad strategy, I just don't think it's the best strategy and won't recommend it.
 
NewToEverything said:
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.
Click to expand...


welcome to Early-Retirement

first of all please note i live in Australia ( so some ideas will be similar but not identical )

in 2011 , i bought into VAS ( ASX top 300 , that is the 300 biggest locally listed stocks by market capitalization ) and VHY ( Australian listed stocks selected by high dividend yield ) both stocks have their dividends re-invested ( automatically )

sadly i did NOT invest equal amounts of cash in each , so not an exact comparison

now by $value increase VAS wins ( so far ) because the VAS unit has risen strongly in price but by GROWTH VHY wins , the unit prices haven't risen so strongly but it has given me more shares reinvested , despite being the smaller holding ( by $value and number or units held



Dividend Reinvestment Plan - DRIP

https://www.investopedia.com/terms/d/dividendreinvestmentplan.asp

The Perks Of Dividend Reinvestment Plans

https://www.investopedia.com/investing/perks-of-dividend-reinvestment-plans/


but if you are talking several thousand dollars ( say over $20K ) one or the other ... not both :confused:

each will do better at different times

cheers !!

ETFs are only a SMALL part of my holdings ( i use them as an insurance against bad share selection )
 
RunningBum said:
VHYAX is a very new fund. There's nothing wrong with that, especially for an index fund that should not have a way to be mismanaged, but you can't make any projections about growth from it's very, very short history.
Click to expand...
VHDYX or VHYAX is capturing large cap US value, but goes further, a bit. You can see this in the style box. There are definitely stats on the history of large cap value that go back much further than this fund. It's an index fund, so I don't think Vanguard can mismanage. But I could be wrong.
 
OP,
Others have suggested reading up on Total Return vs Dividend investing strategies. Here's a good primer from Investopedia: https://www.investopedia.com/ask/an...-important-dividend-yield-or-total-return.asp

Quoting from the article: "While the dividend yield only takes into account actual cash dividends, total return accounts for interest, dividends and increases in share price among other capital gains. On the surface, this appears to provide a more encompassing, and therefore useful, performance metric than the dividend yield".

Personally, on the equity side, I have Total Stock Market as well as dividend-focused (pssst!) Wellesley, plus some others (REIT, Sm Cap, Healthcare, International).
 
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FWIW VHYAX is not a new fund. It is simply the new Admiral share fund with reduced minimums and ER.
Personally I own both VTSAX and VYM in different accounts. While not what I would call a very high dividend fund the VG offerings add a level of diversification on the equity side. A little more diversification than I would get with the equity holdings in Wellesley or Wellington.
 
foxfirev5 said:
FWIW VHYAX is not a new fund. It is simply the new Admiral share fund with reduced minimums and ER.
Click to expand...
You're right. So there is a history with VHYAX/VYM (ETF version). Comparing hypothetical growth and annual returns (which both include reinvested dividends) of VYM and VTI, VYM comes close to matching VTI but falls a little short.

Past history is no indication, blah blah blah, but that should take away any notion whatsoever that the higher dividend yield of VHYAX/VYM makes it more attractive, at least for someone in accumulation mode.

The reason one would buy VHYAX is if you favor value stocks over a blend of the total market, or if you want to live off the dividends without touching principal.
 
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NewToEverything said:
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.
Click to expand...

I suggest you do some reading. Knowledge is much better than asking some strangers on the web.

Start here: https://www.bogleheads.org/wiki/Bogleheads®_investing_start-up_kit

Regarding dividend vs total return investing, I suggest total return. Go over to bogleheads.org and do a search for "total return" and you'll find reams of discussions on the subject.
 
When this is for long term investing, and the IRAs won't be tapped for a long time, then ignore dividend yield. It's all about total return and you will supposedly be reinvesting any dividends anyway.

Just because a fund has a higher yield doesn't mean it has a higher total return.
 
RunningBum said:
I never said it was bad to live off dividends. It's just not what I recommend, because I'm a total [-]value [/-] return investor. I want the largest return on growth + dividends. I think over time the total market fund will have a larger return over a high dividend fund. I could be wrong. People who live off dividends do not sell any of the principal, in my understanding. I have no problems selling a small part of a stock that (hopefully) has grown. With a 3.09% yield and not touching the principal, that is your withdrawal rate and I think you had to work longer to accumulate enough to live off 3.09% as opposed to being a total [-]value[/-] return investor and living off of a 3.5% withdrawal rate, which most agree is quite safe.
Click to expand...
I meant to say "total return" here rather than "total value". Just so there's no confusion.
 
It's been stated in different terms in previous replies, but it is basically the "money is fungible" conclusion. In the end it is the total return (price appreciation plus dividends) that will get you the increased total of your savings in the end. Since you are long term 10 years plus time horizon, don't get mixed up with chasing dividends. Focus on what will give the best overall total return.


Once you are into a withdrawal mode, then the parameters change. Using dividends to live on and not reinvest could be your desired method. Dividends may also have some favorable tax reasons to pursue that vs higher price appreciation and selling stocks.


Your question about dividend reinvestment: yes the dividends just buy more shares of the same fund you have. If you take the dividends in cash, then they will sit in the account as a cash balance, waiting for you to do something with the money.
 
If I had 200K sitting around, and had narrowed it down to 2 choices, that were close in many ways including risk, I'd split the difference and buy 100K of each.

Neither seem to be bad choice.
 
VHYAX (previously VHDYX before VG made the changes to Admiral funds @ $3K and replaced VHDYX) and VTSAX (Total Stock) are very different funds..

VHYAX holds only 395 stocks. VTSAX, by comparison, holds 3,567 stocks - so is MUCH more diversified.

M* Style boxes are also very different:

VHYAX: 52% LC Value, 32% LC Core, 5% LC Growth; 9% Mid-Cap; 2% Small Cap
VTSAX: 25% LC Value, 26% LC Core, 26% LC Growth; 17% Mid-Cap; 6% Small Cap

VTSAX beats VHYAX in all periods where they both existed..
1Y: +1.78
3Y: +2.73
5Y: +0.71
10Y: +0.67

That said, VHYAX is "Below Average" risk for the 3, 5 and 10Y periods while VTSAX is "Average" risk for those same periods.

Hard to recommend one or the other as it depends on your overall AA and goals for the $$..
 
24601NoMore said:
... That said, VHYAX is "Below Average" risk for the 3, 5 and 10Y periods while VTSAX is "Average" risk for those same periods. ...
Click to expand...
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.
 
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
 
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