Dividend Index Funds or Dividend Stocks?

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Gilberto de Piento
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Dividend Index Funds or Dividend Stocks?

Post by Gilberto de Piento » Fri Jul 06, 2018 9:24 am

What do you think of dividend index funds like https://investor.vanguard.com/mutual-fu ... file/VHDYX or https://investor.vanguard.com/mutual-fu ... view/vdigx (closed)?

I know there is a lot of interest in dividend stocks around here but I'm not sure I have the time to research individual stocks and I'm not sure I trust myself with picking even if I did. How different is the index fund from what people around here end up with when they pick individual stocks?

Right now my asset allocation is about 11% in cash, 68% in Vanguard VFFVX target 2055 (90% stocks, 10% bonds, both US and international), 11% in Vanguard VTSAX (US total stock market), and 10% in my house (sort of an investment, sort of not). I've been doing some thinking about what it would be like to try to live off of my current, somewhat volatile allocation and I think it might be a rough ride, even when things are good like they have been lately. I want to DCA about $20,000 of my cash into some sort of investment (even though everything feels high right now). What do you think?

George the original one
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Re: Dividend Index Funds or Dividend Stocks?

Post by George the original one » Fri Jul 06, 2018 9:30 am

Gilberto de Piento wrote:
Fri Jul 06, 2018 9:24 am
How different is the index fund from what people around here end up with when they pick individual stocks?
Index funds for dividend stocks have low yields compared to what I hold. Except for a few, they are not oriented towards dividend growth.

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C40
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Re: Dividend Index Funds or Dividend Stocks?

Post by C40 » Fri Jul 06, 2018 11:46 am

I have a big chunk of my money in a few different vanguard dividend focused funds. One of the things I don't like about them is that the dividends are not consistent amounts like for individual stocks. It makes it harder to track (and particularly project) income.

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Re: Dividend Index Funds or Dividend Stocks?

Post by KevinW » Fri Jul 06, 2018 12:34 pm

You could also look at low-expense actively managed equity income funds such as VEIRX https://investor.vanguard.com/mutual-fu ... view/veirx .

The distributions seem to be more consistent than ETFs', and expenses are only negligibly higher. In general I prefer indexes due to manager risk, but equity income is such a simple strategy that I'd be ok trusting managers with that. Yield is still lower than you could achieve with individual stocks, but there's always going to be some kind of tradeoff when you invest passively.

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Re: Dividend Index Funds or Dividend Stocks?

Post by Jason » Sun Jul 08, 2018 9:59 am

I decided to purchase dividend stocks two years ago. Like most people picking stocks, I am somewhere between Warren Buffet and a drunk monkey throwing darts at The Wall Street Journal while partying at the Playboy Mansion but obviously more highly resembling the latter so the upshot is I shouldn't be picking stocks. But I did anyways as It seems to be the "easiest" type of stock to pick if you go with the big ones because most likely, the stock will not drop precipitously and you still get dividends while leaving the possibility to win big on both ends. So for instance, IBM and Starbucks sucked, but not "fuck me" sucking. However, ATVI, NKE, ABBV, CSCO were "Fuck yeahs!!!" because the stock prices spiked and the dividends came in. Caterpillar was the "Why didn't I buy that one?" These picks were the source of the greatest growth in my portfolio during this time so I recommend it. For someone like myself who can't run a business, stocks are the closest thing I have to employees and dividend stocks seem to be the best employees to hire because even if suck at their job they show up for work on time and spend a predictable portion of their salary buying unhealthy shit in your vending machines. Growth stocks might come up with an ingenious idea and make you a boat load but they could also die over the weekend of a cocaine overdose. I never bought an IPO.

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cmonkey
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Re: Dividend Index Funds or Dividend Stocks?

Post by cmonkey » Sun Jul 08, 2018 10:17 am

Picking dividend stocks gets easier the more you do it, I'd suggest trying it out. I make sure I don't buy into a position too much at a time ( a few thousand at a time over 4-6 months) so that if it drops, I can get more and lower my cost basis. If it goes up, I don't buy any more until it comes back to where I bought originally at the least.

I also watch a dropping stock for a while before entering because they usually drift lower for longer than you'll think ( pharma stocks are a good example ). I haven't picked a final upper limit for any single stock ( right now it's 5 figures ), but I do know I don't want more than about 20-25 different stocks.

What I try to do is pick stocks that are dropping due to broader market issues instead of specific company issues ( say WBA compared to GE ). Companies of the former selection will likely turn around and won't drop as much before they do. Definitely don't buy anything with high payout ratios ( 65%+) because they are higher risk of getting cut. Also, don't chase yield too much ( as fun as it is ) because a dividend that's lower yielding and growing faster will quickly surpass a slow growing, high yield payout.

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Re: Dividend Index Funds or Dividend Stocks?

Post by arcyallen » Sun Jul 08, 2018 11:04 am

Gilberto, I'd recommend sticking with funds unless you're really ready to dive deep into company and stock analysis. There's too many ways to screw up your investments by doing what feels right, taking shallow advice on stock movements, etc.

It's a tough game. Buying blue chip companies at reasonable prices that have a long history of raising dividends is usually going to do alright but again it is still behaviorally difficult. For instance, cmonkey said "if it goes up, I don't buy any more until...". That might work ok for cmonkey (WHAT DOES THAT C STAND FOR?1??!? I must know), but that means you lose out on possibly buying great companies at great prices because they were above an arbitrary number. Understand, I don't have a better simple "system" than that, I am just pointing out the shortfall of this particular one.

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Re: Dividend Index Funds or Dividend Stocks?

Post by Smashter » Tue Jul 10, 2018 2:07 pm

I always assumed the "c" in cmonkey was for cubicle.

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C40
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Re: Dividend Index Funds or Dividend Stocks?

Post by C40 » Tue Jul 10, 2018 2:53 pm


Smashter
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Re: Dividend Index Funds or Dividend Stocks?

Post by Smashter » Tue Jul 10, 2018 3:36 pm

BUT

https://www.urbandictionary.com/define. ... e%20monkey

Sigh, you're probably right, as cmonkey is far from "soulless" :)

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FBeyer
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Re: Dividend Index Funds or Dividend Stocks?

Post by FBeyer » Wed Jul 11, 2018 2:21 pm

cmonkey wrote:
Sun Jul 08, 2018 10:17 am
... Also, don't chase yield too much ( as fun as it is ) because a dividend that's lower yielding and growing faster will quickly surpass a slow growing, high yield payout.
I agree on: do not chase yield, but I disagree a little on the growth rate comment.
It's worth plotting the expected dividend yield and comparing say, a 5% yield growing at a rock-steady 7% every year vs a 6% yield growing at 5% every year.
After 10 years the yield of the highest growing stock surpasses the other, but in that time frame the total amount of moolah you've extracted from the higher yielding company makes quite a difference. Chasing yield is a terrible strategy, but a 5% yield compared to a similar company with a 6% yield should come with a very lucrative ( and sustainable) growth rate if you need your portofolio to grow. If you've got other concerns than growing the stash, naturally, there are a lot of other factors.

I just wanted to harp a bit on the expectation of what a dividend growth rate is really going to do for you compared to the yield out of the gate. We're not talking small change here.

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cmonkey
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Re: Dividend Index Funds or Dividend Stocks?

Post by cmonkey » Wed Jul 11, 2018 3:30 pm


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Gilberto de Piento
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Re: Dividend Index Funds or Dividend Stocks?

Post by Gilberto de Piento » Thu Jul 12, 2018 8:08 am

What about the idea of continuing to invest in a total market index fund as I have been and then switching over when I retire? Other than not having the experience having my money in dividend stocks, what other costs are there?

Any recommended books on dividend stock investing? I looked at the ERE book list but didn't see anything. I read some of https://www.dividendgrowthinvestor.com/ and it seemed to make sense, though it also sounded like more work than I have time for right now.

How much time do you put into selecting the stocks in the first place and then reviewing them to make sure that you don't need to sell them? Or do you hold forever no matter what?

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C40
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Re: Dividend Index Funds or Dividend Stocks?

Post by C40 » Thu Jul 12, 2018 9:41 am

Of the (quite simple) books I read on dividend growth investing, the one I liked most is called "The single best investment"

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FBeyer
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Re: Dividend Index Funds or Dividend Stocks?

Post by FBeyer » Thu Jul 12, 2018 12:11 pm

...by Howard Miller. It's available for absolutely free as a pdf if you google it.

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FBeyer
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Re: Dividend Index Funds or Dividend Stocks?

Post by FBeyer » Thu Jul 12, 2018 12:41 pm

Gilberto de Piento wrote:
Thu Jul 12, 2018 8:08 am
... and then switching over when I retire? Other than not having the experience having my money in dividend stocks, what other costs are there?
The emotional change from the cosyness and annual expenses of an index to the risk and no-fees of individual stocks? The fear and consequences of choosing wrong the first 10 times you buy a 'dividend stock'. Getting used to seeing your principal jolt around like a toddler on a bouncy castle and getting used to keeping your eye on whether the dividend is still safe or not, rather than the current resale value of your holdings?

Sitting there with your newly acquired Financial Independence and kickstarting your 'new life' with analysis and technicals(I've learned by now that it's not rare to wait 6 months from a stock becomes a sure-buy until it's finally done falling in price)?

From a psychological standpoint owning a total market index is vastly different than owning a home built ATM with a fluctuating price tag. I vastly prefer the latter myself, but the psychology is worth noting.

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Gilberto de Piento
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Re: Dividend Index Funds or Dividend Stocks?

Post by Gilberto de Piento » Thu Jul 12, 2018 2:45 pm

The emotional change from the cosyness and annual expenses of an index to the risk and no-fees of individual stocks?
Sorry I wasn't more clear. I meant from an all market index to a dividend index.

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Re: Dividend Index Funds or Dividend Stocks?

Post by jennypenny » Thu Jul 12, 2018 3:35 pm

Gilberto de Piento wrote:
Thu Jul 12, 2018 8:08 am
What about the idea of continuing to invest in a total market index fund as I have been and then switching over when I retire?
OT ... As I get older and watch more and more people retire, I've found that thinking of retirement in terms of 'before' and 'after' sets one up for failure. With regard to investments in particular, I don't see any reason to change one's investments substantially just because of retirement. They should be based on what the best investment prospects are based on the individual and the environment. Maybe I could see investing a small amount (like 10%) in HY to live on while tucking the rest away, but even that should be thoroughly tested while working IMO.

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Re: Dividend Index Funds or Dividend Stocks?

Post by arcyallen » Fri Jul 13, 2018 7:54 am

jennypenny wrote:
Thu Jul 12, 2018 3:35 pm
Gilberto de Piento wrote:
Thu Jul 12, 2018 8:08 am
What about the idea of continuing to invest in a total market index fund as I have been and then switching over when I retire?
With regard to investments in particular, I don't see any reason to change one's investments substantially just because of retirement. They should be based on what the best investment prospects are based on the individual and the environment.
While I agree retirement by itself shouldn't change one's retirement strategy, -taking income- may change it substantially. If you're in the accumulation stage volatility is your friend - big drops give you a chance to buy cheap. But in the withdrawal stage, big drops force you to -sell- cheap. So I'd say the big difference would be you'd want less volatility in your accounts once you start withdrawaing.

Example: It's very possible for Investment "A" to have a higher rate of return than Investment "B" during a non-withdrawal stage, but "B" actually makes more than "A" once you start taking withdrawals due to "A" having more volatility.

George the original one
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Re: Dividend Index Funds or Dividend Stocks?

Post by George the original one » Fri Jul 13, 2018 9:29 am

jennypenny wrote:
Thu Jul 12, 2018 3:35 pm
OT ... As I get older and watch more and more people retire, I've found that thinking of retirement in terms of 'before' and 'after' sets one up for failure. With regard to investments in particular, I don't see any reason to change one's investments substantially just because of retirement.
Ditto. Why would you stop following an investment plan that's been working for you?

The big difference (as arcyallen notes and as I'm living through) is that post-retirement, one needs to smooth out the market dips because you no longer have a reliable surplus income. Usually this is done with a bigger cash cushion in the form of a CD ladder or bond ladder. Conventional retirement advice is a 5-yr ladder to cover big market dips, but if you already have a more reliable retirement income (annuity, pension, social security, etc.), then I can see a 2-yr ladder being adequate.

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