Vanguard expert on total return vs. income producing

[RunningBum]

From a recent webcast Q&A

https://personal.vanguard.com/us/insights/video/3253-Retail-Exc2

"What are the most costly mistakes that people make when managing their own portfolios and retirement?"

Maria Bruno: I'll start. I think two. One would be focusing on income throughout retirement. So focusing on trying to generate income as opposed to looking at the portfolio holistically and investing for total return, which would be both growth and income. Especially in the low interest rate environment that we've been living in, it's very difficult to get an adequate level of income only from a portfolio without altering the characteristics of the portfolio. So I think that would be one.

 

[rayinpenn]

What did they really say? Not much. I am not yet retired but have always favored dividend producing equities and ETF dividend funds. DVY, IDV and SO for example. I've got a few of their index funds as well -Funny thing is I never sell its kind of set it and forget it investing.

There's no doubt chasing returns if done to an extreme carries a good deal of risk. I prefer the steady eddies of the world. I don't focus on the current market value I do focus on the income stream. If your not selling that's what is important.

I love the term expert - what does it really mean? I've been investing for decades and Ive learned avoid experts. Many are simply salespeople. Diversify and invest in what I understand is my mantra and it's worked ..l


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[samclem]

I prefer the steady eddies of the world. I don't focus on the current market value I do focus on the income stream. If your not selling that's what is important.

But when the dividend payers have been bid up, it can get expensive to buy that income stream, so paying attention to the price when buying is important.

I'm a believer in "total return", but my portfolio is tilted toward value stocks. One benefit of that is that the portfolio tends to have a higher dividend yield than a straight "total market" portfolio. But I'll sell stocks to have money to spend. Stocks add to my wealth in two ways: Dividends and price appreciation (which--long term--should be linked to dividends). I can't see any reason to ignore one of those two mechanisms when deciding how much can be harvested from the portfolio each year.

 

[ERD50]

....

I'm a believer in "total return", ...

+1

But for me, it sounds a little like saying "I believe in gravity".

At the end of any period, my portfolio is worth $X. There is no distinction between the money made from appreciation and that made from divs (outside of tax considerations, which likely favor appreciation). I also believe that if one was clearly 'better' than the other, for the same risk level, the difference would be arbitraged away.

Take a look at this total return chart (run the slider to max time period, June 2007):

PerfCharts - StockCharts.com - Free Charts

SPY clearly outperforms the dividend funds, ahead almost the entire time (brief periods where it maybe dips below one or the other, a little hard to see on the chart), and finishes the period at 60% up, while DVY trails at 40% up, and IDV ends the period near ZERO%. What's to like?

Yes, SO is up at ~ 80%, but that is not a diversified fund, so not really apples-apples. As a counterpoint, BRK/A, which does not pay any divs at all, is up to 90% over the time period.

I really just can't see any reason to focus on divs versus total return. I like (after-tax) money, I don't care what form it came in, as long as it was legal. I'm not sure why others care, especially with these histories.

-ERD50

 

[eta2020]

+1

But for me, it sounds a little like saying "I believe in gravity".

At the end of any period, my portfolio is worth $X. There is no distinction between the money made from appreciation and that made from divs (outside of tax considerations, which likely favor appreciation). I also believe that if one was clearly 'better' than the other, for the same risk level, the difference would be arbitraged away.

I just do not like to do any trading, buying, selling. So I kinda like dividend yield in taxable accounts. It generates XYZ a year. I take XYZ / 12 and transfer that amount monthly to my checking account

Takes no genius and provides for high returns since I get fund returns and not investor returns .

BTW focusing on income is buying junk that produces lot of immediate income. Focusing on dividend is buying quality that pays more and more as times goes on. Delayed gratification

 

[soupcxan]

SPY clearly outperforms the dividend funds, ahead almost the entire time (brief periods where it maybe dips below one or the other, a little hard to see on the chart), and finishes the period at 60% up, while DVY trails at 40% up, and IDV ends the period near ZERO%. What's to like?

1. You need to look at volatility as well as total return. A quick look at monthly returns for VFIAX and VEIRX back to 2001 shows that VEIRX had a slightly lower average monthly return but the lower return was more than offset by the lower volatility of VEIRX, so you are getting more return per risk with it.

2. You can't cherry pick time periods. I compared total returns on VFIAX and VEIRX from Vanguard's site and the excess annual return (loss) from using the dividend-focused fund over the S&P500 fund was:

1 year: -4.32%
3 year: -2.14%
5 year: -0.20%
10 year: +0.50%

Here is the chart you used showing this, the dividend fund is up ~30% over the S&P 500 in total since 2001.

 

[RunningBum]

What did they really say? Not much. I am not yet retired but have always favored dividend producing equities and ETF dividend funds. DVY, IDV and SO for example. I've got a few of their index funds as well -Funny thing is I never sell its kind of set it and forget it investing.

There's no doubt chasing returns if done to an extreme carries a good deal of risk. I prefer the steady eddies of the world. I don't focus on the current market value I do focus on the income stream. If your not selling that's what is important.

I love the term expert - what does it really mean? I've been investing for decades and Ive learned avoid experts. Many are simply salespeople. Diversify and invest in what I understand is my mantra and it's worked ..l

You're right, she didn't say much, as in no qualifiers like "don't carry it to the extreme". Just plain and simple, focusing on dividends instead of total return is one of the two biggest mistake individual investors make. Period.

"Expert" was my term. Her title is "Senior Investment Analyst". It's just an opinion, one that I happen to share. If you disagree that's your right, and how you invest is your business. Higher dividend stocks are often stable stocks and in most cases are good "buy it and forget it" stocks. Until they aren't. Not caring about the market value is a mistake in my opinion because if it falls and there are underlying problems with the stock, the dividend will eventually be cut, and then you have the double whammy of less income and less value.

 

[NW-Bound]

Dividend is good, dividend is money in your pocket.

But when dividend comes from unsustainable business activities, such as subprime loans made by the financial sector in the last housing bubble, then dividend will be short lived. So is the stock, I like to add.

 

[Danmar]

Hard to argue that total return is the way to go. This doesn't mean you have to exclude div payers from your portfolio. I like others above, like the steady returns generated by growing divs. I don't reach for yield and my portfolio current yield is about 3.75%. I have beat all reasonable benchmarks since I started in 1997. My total return is about 12.5% CAGR, But this is meaningless as my portfolio is not sufficiently diversified. I am working on making it more so but not in a rush.

 

[Ed_The_Gypsy]

Just for grins, here is a comparison of Wellington vs S&P 500 since 1999:
PerfCharts - StockCharts.com - Free Charts

WOW!

P.S., how do you attach a thumbnail like that?

 

[RunningBum]

Wellington is about 1/3 bond though, isn't it? That's going to lag a rising stock market.

 

[ERD50]

1. You need to look at volatility as well as total return. A quick look at monthly returns for VFIAX and VEIRX back to 2001 shows that VEIRX had a slightly lower average monthly return but the lower return was more than offset by the lower volatility of VEIRX, so you are getting more return per risk with it.

2. You can't cherry pick time periods. I compared total returns on VFIAX and VEIRX from Vanguard's site and the excess annual return (loss) from using the dividend-focused fund over the S&P500 fund was:

1 year: -4.32%
3 year: -2.14%
5 year: -0.20%
10 year: +0.50%

Here is the chart you used showing this, the dividend fund is up ~30% over the S&P 500 in total since 2001.

I agree with your comments, and I hope you didn't think I 'cherry picked' the dates for the chart I posted. I simply entered the symbols from post #2, and slid the time-bar to the max. I'd guess that was the initial date for one of those funds, but I just took what it gave me.

My point is we should look at everything, not simply whether the fund is a 'dividend fund' or not.

-ERD50

 

[soupcxan]

I agree with your comments, and I hope you didn't think I 'cherry picked' the dates for the chart I posted. I simply entered the symbols from post #2, and slid the time-bar to the max. I'd guess that was the initial date for one of those funds, but I just took what it gave me.

My point is we should look at everything, not simply whether the fund is a 'dividend fund' or not.

-ERD50

No I didn't mean to imply you intentionally cherry picked. But personally I like dividend focused stocks, even with the tax inefficiency, and so that's what I buy.

 

[Mulligan]

I just do not like to do any trading, buying, selling. So I kinda like dividend yield in taxable accounts. It generates XYZ a year. I take XYZ / 12 and transfer that amount monthly to my checking account

Takes no genius and provides for high returns since I get fund returns and not investor returns .

BTW focusing on income is buying junk that produces lot of immediate income. Focusing on dividend is buying quality that pays more and more as times goes on. Delayed gratification

Not in disagreement with your above thoughts, but you can find higher yield without chasing junk that yields similar yield. Buy high quality companies' lower end issuances, not the senior obligations of junk companies. I just snagged an investment grade utility preferred a couple days ago that will pay until the cows come home at a 7.18% yield (provided they never call it ). So you can get great yield in right opportunities that are conservative in nature. CHS is a Fortune 100 company nobody has ever heard of that has a solid balance sheet and pays near 7% without any undue risk.
That being said, FWIW, I believe total return is the best way to invest for most people.


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[turbo89]

Wellington is about 1/3 bond though, isn't it? That's going to lag a rising stock market.

This X2.

Here's Vanguards Dividend Growth Vs. SPY. Much better correlation:

PerfCharts - StockCharts.com - Free Charts

 

[mathjak107]

total return is what is all about . nothing else matters since paying a dividend without offsetting the payment is a drop in value of the investment .

in fact it is still a drop in the value of the investment if you do not reinvest it.

what you will have is less money compounding for you at the start of each quarters bell if you pocket that dividend .

 

[dallas27]

The value of a dividend is that management is encouraged to focus on small bets for sustaining positive cashflow for the long term, as opposed to making large high risk bets that might sink the ship.


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[enjoyinglife102]

The best investment strategy is one that is financially sound and the individual can follow through good times and bad, not maximizing returns. A portfolio that produces a good income stream often allows someone to ride out bad times and thus results in behavior invaluable towards long term success. It's the same with allocation choices, one has to land on an approach that works for them balancing a number of factors.

 

[ERD50]

The value of a dividend is that management is encouraged to focus on small bets for sustaining positive cashflow for the long term, as opposed to making large high risk bets that might sink the ship.


...

Can you back this up with some data that is relevant to personal investors ?


-ERD50

 

[Mulligan]

The best investment strategy is one that is financially sound and the individual can follow through good times and bad, not maximizing returns. A portfolio that produces a good income stream often allows someone to ride out bad times and thus results in behavior invaluable towards long term success. It's the same with allocation choices, one has to land on an approach that works for them balancing a number of factors.

That is where I am at. My pension system invests total return, so I have the luxury of not having to do so. My method will allow me to have "higher lows" albeit at the cost of "lower highs".


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[soupcxan]

Can you back this up with some data that is relevant to personal investors ?

Finance theory

• agency problem: managers with excess cash will spend it on poor investments just to make the firm larger when they should be returning it to shareholders.
• signaling: management knows that cutting the dividend is received negatively by investors. so a manager that establishes a dividend is signaling that the firm has good prospects and won't need to cut the div

I'm sure there are academic studies that support these theories. Probably an equal number that don't support it.

 

[ERD50]

Finance theory

• agency problem: managers with excess cash will spend it on poor investments just to make the firm larger when they should be returning it to shareholders.
• signaling: management knows that cutting the dividend is received negatively by investors. so a manager that establishes a dividend is signaling that the firm has good prospects and won't need to cut the div

I'm sure there are academic studies that support these theories. Probably an equal number that don't support it.

I don't disagree with that line of thinking, what I'm asking is, 1) does it play out in a meaningful way in real life? 2) Is the delta significant enough for me to change my investment strategy? 3) If so, at what point is it noticed and arbitraged away?

Answering my first two questions requires data. If an equal number of studies were to dispute/support the idea, there probably isn't anything significant there.

-ERD50

 

[soupcxan]

All I know is, I like cash on the barrelhead.

 

[ERD50]

All I know is, I like cash on the barrelhead.

And I like to make my decisions based on data!

Hey, there's certainly nothing 'wrong' with a dividend approach, and it might be advantageous - it's just that if someone suggests that A is better than B, I like to understand why that might or might not be the case.

Total return provides cash on the barrel-head as well. The only difference is, you might need to sell some to obtain the delta in dividend payouts (which is pretty much all the dividend payers are doing internally, right?).


-ERD50

 

[mathjak107]

yep , they are just handing you back a piece of your share price.

nothing you can't do on your own.