Dividend stock vs bonds

[JJpop]

Ok. I know the difference between stocks and bonds and total return vs dividend investing.
I see the low low yields on fixed income and I have an extremely low stock allocation anyway.
My question is what is the negative about buying a quality dividend etf like SCHD or fund VEIPX in taxable and just taking the dividends for income. We are in the 12 pct bracket so no taxes on the dividends.
Also very happy to keep very long term and add to my stock allocation.
I am thinking 100K which would provide 300 plus a month to spend and over the long haul also provide a decent return.
No interest in selling shares every month. Just want to keep it simple for my wife as well in case something happens to me.
Very content with the holdings on both SCHD and VEIPX.

 

[foxfirev5]

Welcome to my world. However it's not that easy. I own both of your mentioned funds plus a few. I have been living on divies and CD interest. Both are dropping at an alarming rate. Do not fall for the current yield rates on stock funds. The NAV's have fallen which raised trailing rates while the dividends are sure to fall in the future. Personally I am holding VEIRX, SCHD, HDV, SPYD and few others for the dividends in our tIRA's. However our Roths' are leaning toward more total stock market holdings.

Asset allocation is also a major consideration. DW and I are overall 40/60 equity/ fixed income with the fixed representing 25-30 years of our future expenses.

Everybody's situation is different. Personally I like to diversify and keep a little in divy income, CD income and draw a little from the CD principal if all else fails. Good luck to us all.

 

[JJpop]

The dividend yield should return as the market gradually recovers I would imagine. I am fine if the yield is 3 pct instead of the newly stated 4 or so. I seriously doubt that SCHD’s yield will be cut in half.

 

[Sunset]

If your stock allocation is lower than you want, then nothing wrong with increasing it.

I'd much rather go with an etf like SCHD , or VTI than a single stock, as should a single stock be the choice you are at tremendous exposure for a dividend cut effect if it happens. With an ETF, even if 10 companies cut their dividend to zero, you are still going to get something.

I'm in the opposite position, too high on stocks.

One advantage of bonds over stocks, (at least treasury bonds), is that should the stock market pull a Great Depression , the bond fond won't lose 95% of it's value.

So the question is: Do you feel lucky..

 

[JJpop]

I am not concerned about massive long term losses. I am looking at it more like a collection of 100 long term quality Corp bonds.Collect the interest for years and eventually get your principal back.Hopefully make a decent return.
I understand the difference but that is my mindset.If SCHD is down 50 pct the next 10 years we all will be in a world of hurt.

 

[COcheesehead]

Equities don’t have a par value like bonds do. No guarantee you will get back to your original investment.
If SCHD goes down 50%, your bonds may actually appreciate.

 

[JJpop]

Equities don’t have a par value like bonds do. No guarantee you will get back to your original investment.
If SCHD goes down 50%, your bonds may actually appreciate.

I realize that.
Goal is simply 3000 to 4000 per year in dividends to spend and when I go to the great beyond hopefully leave well more than 100K to someone.
In 20 years it might be 200,000. Who knows. The ETF is as safe as the SP 500 in my opinion in terms of bad outcomes.

 

[ERD50]

Ok. I know the difference between stocks and bonds and total return vs dividend investing.
....

My question is what is the negative about buying a quality dividend etf like SCHD or fund VEIPX in taxable and just taking the dividends for income. ....

False premise.

There is no difference between total return vs dividend investing. Money is fungible. A stock either distributes some of its worth as a dividend, or that worth is retained as part of the stock price. You own that value either way.

The only difference between you selling some stock for income, and the company issuing you a dividend, is that when the company does it you have no control over the amount or timing.

You might say you can have a dividend withdrawal strategy, but I I don't see that as helpful at all. It just clouds the issue with a meaningless term instead of providing clarity. Money is fungible - it's all money, dividends or stock value.

Or you might say you have decided to invest in a specific sector (stocks with certain dividend criteria) - but that's just sector investing, and you need to ask yourself if this (or any) sector provides enough advantage to take the risk of less diversity in your holdings (and why that would ever be the case in general).

-ERD50

 

[LOL!]

If one has taxable account, then of course one will buy tax-efficient equities for the taxable account instead of bonds. It is practically impossible to buy any broad market index funds that do not pay dividends.

The negative of dividends for me is that I cannot control my adjusted gross income: I get the dividends no matter what. I prefer to control my AGI and taxable income by the amount of capital gains I realize and the amount of Roth conversions I make. I like non-taxed, non-reported return of capital the most.

There is no way I would put bonds in my taxable account at this point in my life.

As for keeping it simple every month: That's what automated withdrawals from a mutual fund are for. If you die, they will keep happening.

 

[OldShooter]

@ERD50, OP is ahead of you on this one. He sees a functiona/operational difference between a total return and a divdend strategy:

... No interest in selling shares every month. ...

@LOL! is right, of course, that there are other ways to skin that cat and other/tax issues, but the OP seems to have a pretty clear view of the fundamentals.

 

[JJpop]

False premise.

There is no difference between total return vs dividend investing. Money is fungible. A stock either distributes some of its worth as a dividend, or that worth is retained as part of the stock price. You own that value either way.

The only difference between you selling some stock for income, and the company issuing you a dividend, is that when the company does it you have no control over the amount or timing.

You might say you can have a dividend withdrawal strategy, but I I don't see that as helpful at all. It just clouds the issue with a meaningless term instead of providing clarity. Money is fungible - it's all money, dividends or stock value.

Or you might say you have decided to invest in a specific sector (stocks with certain dividend criteria) - but that's just sector investing, and you need to ask yourself if this (or any) sector provides enough advantage to take the risk of less diversity in your holdings (and why that would ever be the case in general).

-ERD50

Well if there is no difference what is the big deal if I want a dividend to be deposited in my checking account like clockwork without having to think about it?
It makes no difference if the amount varies some or the timing is a few days off. This is not pay the electric bill money. I am also very content with the quality and the diversity of the holdings.

 

[OldShooter]

Well if there is no difference what is the big deal if I want a dividend to be deposited in my checking account like clockwork without having to think about it? ...

Not to argue, but to answer your question:

There is a difference. With a dividend strategy you minimize non-dividend-payers in your portfolio. Non-dividend-payers are arguably where a lot of growth is, because they are reinvesting their profits in the business instead of distributing them. So your total return will probably suffer.

In a nutshell that is the argument against a dividend-only strategy but, hey, it's your money and your strategy so you get to decide. You are not naive about this IMO.

 

[JJpop]

Not to argue, but to answer your question:

There is a difference. With a dividend strategy you minimize non-dividend-payers in your portfolio. Non-dividend-payers are arguably where a lot of growth is, because they are reinvesting their profits in the business instead of distributing them. So your total return will probably suffer.

In a nutshell that is the argument against a dividend-only strategy but, hey, it's your money and your strategy so you get to decide. You are not naive about this IMO.

Thank you. I am not naive. I realize that SCHD will probably return less than say the SP500. There is also an excellent chance the difference will be very small.
It will not change my life either way.
On the other hand, I see a likely scenario of having a much better long term return than I would if I leave it in fixed income.
I retired 2 years ago with almost zero stocks and 95 pct tax free diversified income of about 45K but a lot of those CD’s will start to mature in 2 years. One large one is maturing next week however.

 

[target2019]

Thank you. I am not naive. I realize that SCHD will probably return less than say the SP500. There is also an excellent chance the difference will be very small.
It will not change my life either way.
On the other hand, I see a likely scenario of having a much better long term return than I would if I leave it in fixed income.
I retired 2 years ago with almost zero stocks and 95 pct tax free diversified income of about 45K but a lot of those CD’s will start to mature in 2 years. One large one is maturing next week however.

We are on the cruise ship SCHD as well.
Take care.

 

[OldShooter]

... I realize that SCHD will probably return less than say the SP500. There is also an excellent chance the difference will be very small. ...

Do you know this site: https://www.portfoliovisualizer.com/backtest-portfolio I just ran SCHD versus SPY and the difference from 2012 to current was about 10%. Given the current collapse of many dividends I don't know how indicative that might be going forward, but you get to decide that too as well as what "very small" means.

Compared to fixed income, of course, history says you are right to he headed into equities. Good luck!

 

[JJpop]

Do you know this site: https://www.portfoliovisualizer.com/backtest-portfolio I just ran SCHD versus SPY and the difference from 2012 to current was about 10%. Given the current collapse of many dividends I don't know how indicative that might be going forward, but you get to decide that too as well as what "very small" means.

Compared to fixed income, of course, history says you are right to he headed into equities. Good luck!

Thanks. Yes I do know the site. Who knows if growth stocks will continue on the tear they have been on. I am fine with a more value oriented etf .

 

[ERD50]

Thanks. Yes I do know the site. Who knows if growth stocks will continue on the tear they have been on. I am fine with a more value oriented etf .

SPY isn't exactly "growth stocks". It's pretty broadly diversified.

You can go with VTI to capture more of the market, and its performance was just a hair behind SPY since SCHD inception, and still outperformed SCHD.

Again, money is money. Take a fixed amount each month/quarter/year from each for living expenses, and you'd b ahead with SPY or VTI over SCHD.

DVY is a similar dividend-focused fund with a longer history, and has done worse than VTI/SPY in that time, and has dropped more than either in this current drop.


https://bit.ly/3dsS708 <<< short link to comparison

-ERD50

 

[JJpop]

SPY isn't exactly "growth stocks". It's pretty broadly diversified.

You can go with VTI to capture more of the market, and its performance was just a hair behind SPY since SCHD inception, and still outperformed SCHD.

Again, money is money. Take a fixed amount each month/quarter/year from each for living expenses, and you'd b ahead with SPY or VTI over SCHD.

DVY is a similar dividend-focused fund with a longer history, and has done worse than VTI/SPY in that time, and has dropped more than either in this current drop.


https://bit.ly/3dsS708 <<< short link to comparison

-ERD50

Yes but is dominated by growth stocks. I understand the situation and realize I probably would be leaving some money on the table. Thank you for your feedback

 

[ERD50]

Yes but is dominated by growth stocks. I understand the situation and realize I probably would be leaving some money on the table. Thank you for your feedback

But in this case, what is the point of leaving money on the table? What is the trade-off that makes it worthwhile?

As an example, most of decide to hold some of our portfolio in bonds, even though we realize that in the long run, we are probably leaving some money on the table. The trade-off is diversification, lower volatility, and the ability to pull money when the market is down w/o having to sell low.

But I've never seen this demonstrated with the high-dividend sector. In bear markets, they seem to drop as much/more than the broad market, and lag it in bull markets.

I fail to see the attraction.

-ERD50

 

[COcheesehead]

But in this case, what is the point of leaving money on the table? What is the trade-off that makes it worthwhile?

As an example, most of decide to hold some of our portfolio in bonds, even though we realize that in the long run, we are probably leaving some money on the table. The trade-off is diversification, lower volatility, and the ability to pull money when the market is down w/o having to sell low.

But I've never seen this demonstrated with the high-dividend sector. In bear markets, they seem to drop as much/more than the broad market, and lag it in bull markets.

I fail to see the attraction.

-ERD50

Yep.

 

[JJpop]

But in this case, what is the point of leaving money on the table? What is the trade-off that makes it worthwhile?

As an example, most of decide to hold some of our portfolio in bonds, even though we realize that in the long run, we are probably leaving some money on the table. The trade-off is diversification, lower volatility, and the ability to pull money when the market is down w/o having to sell low.

But I've never seen this demonstrated with the high-dividend sector. In bear markets, they seem to drop as much/more than the broad market, and lag it in bull markets.

I fail to see the attraction.

-ERD50

You are right of course but ......The main attraction to me is the simplicity for my wife. I also was being swayed some because we have so many CD’s coming due in 2 years,3 years and 4 years, along with the large one in a few days.
As erroneous as it is,it is much easier to buy a quality dividend etf yielding between 3 and 4 pct and see the dividend income come in like the CDs without having to do anything. Thinking positively and projecting a decent total return on top of it makes it more attractive. If I put it in the total mkt and stocks lose money the next 10 years,the dividend etf will also lose about the same amount, but at least we had about 30,000 of income paid out.I know what you are going to say about this last sentence so no need to.
I have been really struggling with the idea of not being able to reproduce the fixed income in a few years, but who knows what yields on CD’s and bonds will be in 2 years. Right now we are averaging 3.15 pct and generating about 50K a year almost all tax free because of my SEP and Roth and a couple GO muni’s,Ibonds and our HSA accounts. I. was very much at peace and not caring about stocks at all. When this covid hit and the market dropped I was really at peace but see this as a time to buy some stock at a discount.

 

[ERD50]

You are right of course but ......The main attraction to me is the simplicity for my wife. ...

Simplicity is easy. Put in a balanced fund, and set the fund up for $X withdrawals to the checking/savings account (the expected delta between budget and dividends) each week/month/quarter/year - your preference.

Since your dividend producers could (and will) vary their payments from time to time, she is still going to need to know how to adjust by selling something or reinvesting an excess, or change her budget to fit.

This would be no different. If the total divs go down, up the regular payments a bit, or trim them down if an excess is building up.

Easy-Peasy.

You could take it one step further with two funds, and tell her to adjust based on maintaining a specified AA. If it's at one place, they probably already show the AA. Just tell her to review once a year, and move the sales to draw from the stock fund if stocks are higher than target AA, or from bonds of they are higher than target. Or ignore that and just take them out as above - in proportion to AA. Close enough.

-ERD50

 

[OldShooter]

Simplicity is easy. ...

OP seeems to have made it pretty clear that he understands your suggestions and is not interested.

 

[Rustward]

OP seeems to have made it pretty clear that he understands your suggestions and is not interested.

This is an observation that I and probably others share.

But -- and there is always a but -- ERD50 is usually right. In fact he has been wrong only one time in recorded history. It was when he thought he was wrong but he was really right.

There is no difference between total return vs dividend investing.
-ERD50

Life is short. Let's spend the rest of it arguing with people we don't know about things that don't matter.

 

[OldShooter]

... ERD50 is usually right. ...

Oh, he's right. It's the same advice I would be giving if the OP hadn't made it clear in his initial post that he already understood.

It's just like buying a govvie fund instead of individual issues. I think that's silly but I try not to argue with people who understand but who have decided its too much of a hassle.