VTI or VIG or not or something else?

[ATXFIRE2034]

Hi all! About 25% or $167k of my investable assets are parked in two Roth IRAs holding VTI. I’ve been debating moving this part of my allocation to VIG to get the dividend engine going and growing over the next 15 years before I FIRE. Would a move like this be wise given my time horizon? Other recommendations for great dividend paying ETFs? Thanks!

 

[Whisper66]

They pay small but similar dividends (VTI 1.34% vs VIG 1.61%). Both have miniscule expense ratios; VTI 0.03%, VIG 0.06%. If you compare their total returns over time using www.portfoliovisualizer.com , they track each other very closely. So bottom line is I don't think it matters which you hold so I'd see no reason to make a change.

Other ETF's may pay more dividends but you need to think about your portfolio in total before considering any specific changes. The two you have listed are highly diversified and would be a good foundation for any portfolio to have.

 

[ERD50]

... to get the dividend engine going and growing over the next 15 years before I FIRE. ...

Why would you want to "get the dividend engine going"? Plug VIG and VTI into the portfolio analyzer link that was provided. VIG lagged slightly, so where is the attraction?

Dividends are just part of the picture. Overall, the investor in VIG had less money, dividends didn't save them. A concentration on dividends is a sector play. History shows that a broad based index approach is a better bet over the long run.

... Would a move like this be wise given my time horizon? ...

Why would you think it would be wise for any time horizon?

...Other recommendations for great dividend paying ETFs? Thanks!

No, because it's a wild goose chase. You're welcome!

-ERD50

 

[RetireeRobert]

OK, here is a recommendation: DGRO
current yield 2.33%
expense ratio 0.08%
portfolio consists of stocks in companies with records of growing their dividends
An ishares ETF

 

[ATXFIRE2034]

They pay small but similar dividends (VTI 1.34% vs VIG 1.61%). Both have miniscule expense ratios; VTI 0.03%, VIG 0.06%. If you compare their total returns over time using www.portfoliovisualizer.com , they track each other very closely. So bottom line is I don't think it matters which you hold so I'd see no reason to make a change.

Other ETF's may pay more dividends but you need to think about your portfolio in total before considering any specific changes. The two you have listed are highly diversified and would be a good foundation for any portfolio to have.

Thank you for the thoughtful response. Good points.

 

[RetireeRobert]

get the dividend engine going and growing over the next 15 years before I FIRE. Would a move like this be wise given my time horizon? Other recommendations for great dividend paying ETFs? Thanks!

15 years is a nice period of time for compounding to work its magic. Yes, a move to somewhat higher, and growing, dividend vehicles seems worthwhile to me given your long time span.

I would say go for it.

 

[ATXFIRE2034]

Why would you want to "get the dividend engine going"? Plug VIG and VTI into the portfolio analyzer link that was provided. VIG lagged slightly, so where is the attraction?



Dividends are just part of the picture. Overall, the investor in VIG had less money, dividends didn't save them. A concentration on dividends is a sector play. History shows that a broad based index approach is a better bet over the long run.







Why would you think it would be wise for any time horizon?









No, because it's a wild goose chase. You're welcome!



-ERD50

Wow....what a response. I suppose my line of thinking was that having a good dividend paying, low cost ETF position in my ROTH accounts would help accelerate tax free compounding growth over time. Then once in retirement years this could also serve as a good source of passive income.

 

[ATXFIRE2034]

OK, here is a recommendation: DGRO
current yield 2.33%
expense ratio 0.08%
portfolio consists of stocks in companies with records of growing their dividends
An ishares ETF

Thanks for the helpful answers!

 

[RetireeRobert]

And Vanguard does have another ETF, naturally also similar low expense ratio, called:
VYM

Invests in basket of higher yield stocks. One quick review I read said its basket of dividend companies actually produced a lot of "dividend growth" over time, even though VIG was supposedly Vanguard's "dividend growth" vehicle. Not sure of VYM's current yield.

 

[Dd852]

Dividends are one of the things guaranteed to get polarized responses on this forum

I understand the emotional call towards a dividend stream. I’ve felt it myself. I also get the mathematical truths about dividends and company value.

That said - I do keep 20% of my portfolio in dividend etfs. I have both VYM and VIG. VIG is funny - it performs on dividends basically like a broad etf and drags on performance. If I were to do over I’d put that back into a broad market tracker. VYM is more what I’d hoped for - significantly higher dividend yield but with accompanying more volatility.

Honestly this is more a question about what you want than about what is right. People have extremely strong views on the subject and can write pages on the theory and the practice. At the end of the day - do you like amounts coming in while you are passive (buy for dividends)? Would you prefer to sell stock when you need money (avoid dividends and buy for growth)? It is your choice - no absolute right or wrong.

 

[ATXFIRE2034]

Dividends are one of the things guaranteed to get polarized responses on this forum

I understand the emotional call towards a dividend stream. I’ve felt it myself. I also get the mathematical truths about dividends and company value.

That said - I do keep 20% of my portfolio in dividend etfs. I have both VYM and VIG. VIG is funny - it performs on dividends basically like a broad etf and drags on performance. If I were to do over I’d put that back into a broad market tracker. VYM is more what I’d hoped for - significantly higher dividend yield but with accompanying more volatility.

Honestly this is more a question about what you want than about what is right. People have extremely strong views on the subject and can write pages on the theory and the practice. At the end of the day - do you like amounts coming in while you are passive (buy for dividends)? Would you prefer to sell stock when you need money (avoid dividends and buy for growth)? It is your choice - no absolute right or wrong.

Thanks for the advice Dd852. And you’re right, it’s a choice. I think since I can’t contribute to my ROTHs due to income limits I’ve reached this year, it makes sense for me to invest in something with those vehicles that will produce some passive income that I can then reinvest.

 

[ERD50]

Wow....what a response. I suppose my line of thinking was that having a good dividend paying, low cost ETF position in my ROTH accounts would help accelerate tax free compounding growth over time. Then once in retirement years this could also serve as a good source of passive income.

OK, now question your own statement that "having a good dividend paying, low cost ETF position in my ROTH accounts would help accelerate tax free compounding growth over time."

We should always question our own assumptions, to test if they are really good and true and helpful, or are they just stuck in our mind as something we just believe to be true (maybe through repetition). So what is your reasoning/evidence to think investing in a sector (div payers) is any better than investing in the broad market?

Tip - this has been discussed before, I have yet to see any evidence that dividend payers live up to the assumptions that they are safer, better, more resistant to downturns, or anything, when compared to the broad index.

-ERD50

 

[ERD50]

Here you go, here's where it was discussed recently:

https://www.early-retirement.org/forums/f44/beware-of-financial-alchemy-106124.html#post2515972

And here's the short link to the analyzer (update the time frame to JAN 2021):

https://bit.ly/2ZWbklN

The group of seven Div payer funds lagged, starting with $1M in July 2007 to Jan 2021, with a 3.5% annual inflation adjusted withdrawal rate from each and annual rebalancing (Note: The time period was constrained by the available data for iShares International Select Div ETF (IDV) [Jul 2007 - Jan 2021]. ):

70/30 Broad Market stocks/bonds: $1,000,000 _ $1,806,845
70/30 Div Sector stocks/bonds__: $1,000,000 _ $1,395,717

The div payer sector is more than $400K behind the broad market, while each is providing the same payout! That's not some small difference!

Back in that thread, I also looked at the 7 div payer funds separately, and only one outperformed the broad market. That's really bad odds. Why play this game?

Do you have numbers to refute this? Or just a feeling (another tip: feelings won't pay the bills!)?

edit/add - since it was mentioned, I just added DGRO. That restricts the time frame further, but guess what? It also under-performed the broad index. These div payers can't catch a break!

-ERD50

 

[Koogie]

With all due respect to ERD50 (who is completely correct, TOTAL RETURN is what matters) what a lot of anti-dividend people forget is the single most important factor in investing: investor behavior.

Anti-dividend people (a lazy but descriptive label) can see the mathematics of total return clearly and act logically without deviation. Like complete "total return robots"

Not everyone is built this way.

I myself like the comfortable feeling of a reliable dividend stream. During unpleasant moments in the market it can stop people from doing stupid things. That can be worth a lot more in the long run than perfect investing and tax efficiency.

It also allows me what feels like more latitude to direct the monthly dividend stream as I see fit as a sort of continual rebalancing. Another psychological benefit.


disclosures:
- I own a boatload of VTI and love it.
- I am a dirty foreigner. In my frozen homeland we get significant tax breaks at my income level for investing in domestic dividend paying stocks.
- I take a hybrid investing approach.

 

[ERD50]

...

I myself like the comfortable feeling of a reliable dividend stream. During unpleasant moments in the market it can stop people from doing stupid things. That can be worth a lot more in the long run than perfect investing and tax efficiency.

It also allows me what feels like more latitude to direct the monthly dividend stream as I see fit as a sort of continual rebalancing. Another psychological benefit.
....

I could put more weight on that if there was more of a practical difference. But (for those in the US), a VTI/BND blend still pays ~ 2% in divs, so for a 3.5% WR, a small annual sale, which is probably done as part of rebalancing anyhow. It just seems like a very minor thing, emotionally or practically, especially compared to that $400,000 delta!

Emotionally, that $400,000 delta affects me a lot more than the idea of an annual mechanical sell/rebalance.

And to be clear, I'm not "anti-dividend". I'm anti-sector, and pro-broad-based-index (which includes everything, divs or not). I'd also reject the idea of investing only in non-div payers, that's also a sector. Just buy the market.

edit/add: and from the logistic side, if the div fund does pay higher than the desired WR, the investor has to make some decision on what to do with the excess. That would seem to take about the same effort/angst as a sell/rebalance. I'm just not seeing anything (emotionally, behaviorally, or otherwise) that justifies the very real underperformance risk of sector investing.

-ERD50

 

[Koogie]

And to be clear, I'm not "anti-dividend". I'm anti-sector, and pro-broad-based-index (which includes everything, divs or not). I'd also reject the idea of investing only in non-div payers, that's also a sector. Just buy the market.

I am sorry if I misstated your position.

I'm just not seeing anything (emotionally, behaviorally, or otherwise) that justifies the very real underperformance risk of sector investing. -ERD50

RISK: Investor behavior during downturn > sector underperformance

~ IMHO a stupid move during a downturn could be just as if not more dangerous than long term "underperformance"

 

[VanWinkle]

I am also a total return guy, but I can appreciate the confidence that may come from dividends for some people. If dividend payers keep you from bailing out of a down market, or hiring an expensive advisor to calm your nerves, then it makes perfect sense to use a low cost diversified dividend fund. Just know it may lag the overall market but may be less volatile in some years. The difference in return will be less expensive than bailing out or getting gouged by
the wrong advisor.

VW

 

[Koogie]

^^^ this is what I was trying to say. Much better articulated.

I would also add that a lot of people are stuck on "maximizing" their return and any amount of "underperformance" is anathema to them.

Myself, I am looking to make a "good" return that I am happy with. I will sacrifice some return in order to have a plan I am comfortable with that I know I can stick with.


"The enemy of a good plan is the dream of a perfect plan"

 

[VanWinkle]

^^^ this is what I was trying to say. Much better articulated.

I would also add that a lot of people are stuck on "maximizing" their return and any amount of "underperformance" is anathema to them.

Myself, I am looking to make a "good" return that I am happy with. I will sacrifice some return in order to have a plan I am comfortable with that I know I can stick with.


"The enemy of a good plan is the dream of a perfect plan"

+1 Great post Koogie!!!

 

[ERD50]

I am sorry if I misstated your position.
...

No problem at all, it's a somewhat subtle/non-obvious distinction, I just wanted to make it clear.

And actually, it is a sort of counter to some of the facetious pro-dividend claims - some sources make a big deal that much of the gain in the market over time is due to dividends. That's a dangerous/misleading truth, because those dividends are a part of the total market, so I'm participating in that. I'm not suggesting avoiding div-payers, which is what it would take for that "truism" to have any meaning.

... RISK: Investor behavior during downturn > sector underperformance

~ IMHO a stupid move during a downturn could be just as if not more dangerous than long term "underperformance"

OK, but why would someone invested in a broad index with a suitable AA be any more susceptible to bad behavior during a downturn than a dividend investor? If you look back at that thread, the div payers generally dropped as much or more than the broad index during downturns, contrary to popular opinion.

-ERD50

 

[ERD50]

I posted before seeing this reply, allow me to catch up:

^^^ this is what I was trying to say. Much better articulated.

I would also add that a lot of people are stuck on "maximizing" their return and any amount of "underperformance" is anathema to them.

Myself, I am looking to make a "good" return that I am happy with. I will sacrifice some return in order to have a plan I am comfortable with that I know I can stick with.


"The enemy of a good plan is the dream of a perfect plan"

I understand the concept, but I really don't see how it applies to this decision.

In this case, maximizing my return comes with no downside that I can see. It isn't really any more effort in any meaningful way. So in what way is it a sacrifice, or how does it provide comfort, when the numbers don't back it up? I'm not a fan of tricking myself into a false sense of security, and fro what I've seen, that's all these div-payers provide..

Now, if I was saying that you need to monitor a dozen market factors every day, and buy and sell based on these factors, and that is what is needed to outperform a div-paying sector fund, you'd have a point. But it is simple couch-potato approach, with an annual rebalance/sell. Boring, simple, and far more comforting to me than investing in a sector which has a proven history of underperformance, and no real upside that I can see.

-ERD50

 

[VanWinkle]

No problem at all, it's a somewhat subtle/non-obvious distinction, I just wanted to make it clear.

And actually, it is a sort of counter to some of the facetious pro-dividend claims - some sources make a big deal that much of the gain in the market over time is due to dividends. That's a dangerous/misleading truth, because those dividends are a part of the total market, so I'm participating in that. I'm not suggesting avoiding div-payers, which is what it would take for that "truism" to have any meaning.




OK, but why would someone invested in a broad index with a suitable AA be any more susceptible to bad behavior during a downturn than a dividend investor? If you look back at that thread, the div payers generally dropped as much or more than the broad index during downturns, contrary to popular opinion.

-ERD50

Investor behavior is ever changing and very individual. Thinking of their stocks as income instead of assets may calm the inclination to bail out. It is not scientific, but it is representative of the way the human mind works in many people.

VW

 

[Koogie]

OK, but why would someone invested in a broad index with a suitable AA be any more susceptible to bad behavior during a downturn than a dividend investor? If you look back at that thread, the div payers generally dropped as much or more than the broad index during downturns, contrary to popular opinion.

Cash "coming in the door" can do a lot to soothe the nerves during a downturn. It's basic human psychology. Again, it is about the psychology, not the mathematics.

I understand the concept, but I really don't see how it applies to this decision.

In this case, maximizing my return comes with no downside that I can see. It isn't really any more effort in any meaningful way. So in what way is it a sacrifice, or how does it provide comfort, when the numbers don't back it up? I'm not a fan of tricking myself into a false sense of security, and fro what I've seen, that's all these div-payers provide..
-ERD50

I've highlighted the crux of the argument. You. You are comfortable with total return and it works for you. Other people are not of the same temperament.

One of the best pieces of advice I have read on this forum in the last (gulp) 14 years is that "there are many roads to Jerusalem"

ie: there are lots of ways to achieve success and happiness. Everyone will pick the one that works for them. Your plan may be (and probably is) better than mine. But I couldn't stick to your plan and you wouldn't be happy with mine..

edit: again Van Winkle articulates it better in a couple of sentences than I do with my rambling. "What s/he said !!"

edit: apologies to the OP for hijacking their thread with the endless dividend debate.

 

[ERD50]

Investor behavior is ever changing and very individual. Thinking of their stocks as income instead of assets may calm the inclination to bail out. It is not scientific, but it is representative of the way the human mind works in many people.

VW

That may be, but as I've said, it's hard for me to see what the source of this calmness could be once the investor is made aware of the facts.

People can do what they want, that's not my concern. But since I see this forum as such a good source of info, I do feel that the truth about these dividend funds should be brought to light, and myths should not go unchallenged. Much of the "conventional"/"accepted" wisdom regarding dividend payers simply has no basis in fact. And I think an investor benefits by being aware of the facts.

As I pointed out, one of those roads would leave you $400,000 behind. If you want to take that road, it's up to you, but I don't get it.

-ERD50

 

[OldShooter]

... I’ve been debating moving this part of my allocation to VIG to get the dividend engine going and growing over the next 15 years before I FIRE. Would a move like this be wise given my time horizon? Other recommendations for great dividend paying ETFs? Thanks!

You're getting good advice here on dividends. For the record I am a total return investor. All of our money is now in IRAs, and I have no idea when or how much dividends are paid. No interest either.

But implicit in your question is the 15 year goal, and you are probably hurting yourself by limiting your investments to US stocks. Among the thousands of companies you are missing are companies like Volkswagen, Toyota, BP, Nestlé, Ambev, Cemex, Arcelor-Mittal, and of course all investable Chinese companies in the second largest economy in the world, soon to become the largest.

Here's a good study: Vanguard "Global equity investing:The benefits of diversification and sizing your allocation" https://www.vanguard.com/pdf/ISGGEB.pdf and a good 8 minute video: Dr. Ken French on International: https://famafrench.dimensional.com/videos/home-bias.aspx

For the record, DW and I own the world, weighted on a market-cap basis via VTWAX/VT