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  • High dividend index funds

    Does anyone have any experiences with Vanguards (or any other) high dividend yield index fund or equity income fund? A friend asked me about them instead of bonds but I don't know much. At initial glance they obviously have a higher ER then the average index fund without much more overall yield. The income obviously being the dividends. Could possibly have some sort of use within an IRA or HSA, obviously not good in a taxable account. Any thoughts?

  • #2
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    • #3
      Stocks are not substitutes for bonds.

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      • #4


        It may sounds counter indicative but index funds don’t pay dividends out to investors in that fund. Mutual funds do. Index funds track a basket of stocks, currencies, etc. it’s pure price driven.
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        Any time a mutual fund, be it an actively-managed fund or an index fund, receives a dividend from one of the companies owned in the fund, that dividend belongs to the shareholder. Depending upon the investors instructions, that dividend is either reinvested back into the company stock, placed into the account's cash position, or paid out to the investor in the form of a distribution.

        i believe the author of this post has confused the characteristics of an index fund with those of an index-linked insurance product.

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        • #5




          Does anyone else find it interesting that a person who titles him or herself financial consultant doesn’t understand that index funds have dividends?
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          Some of the various posts from last night were so funny that I wasn't 100% sure if it was just troll trying to get a rise out of people, or perhaps an imposter trying to ruin this poor women's reputation by posting nonsense.

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          • #6
            The first Vanguard fund held by my future wife was in her Roth IRA was the Dividend Growth Fund (VDIGX) in 2002.  Held it 15 odd years, 30 bps ER.  It is not an index fund.  FWIW IMO, it performed well over the 15 odd years it was held.  It really depends upon what your friend is looking to achieve.

             

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            • #7
              Most people like high dividend funds are looking for the consistent payout and are trying to find a fund with lower volatility than a typical index fund.  I don't particularly like this approach and prefer some of the low vol etf's out there if that is your objective.  Neither are going to be a substitute for bonds.  Bonds are there to offer protection and are uncorrelated to stocks, while a high dividend or lower volatility fund will still go down with the stock market during a recession.

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              • #8




                Most people like high dividend funds are looking for the consistent payout and are trying to find a fund with lower volatility than a typical index fund.  I don’t particularly like this approach and prefer some of the low vol etf’s out there if that is your objective.  Neither are going to be a substitute for bonds.  Bonds are there to offer protection and are uncorrelated to stocks, while a high dividend or lower volatility fund will still go down with the stock market during a recession.
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                Bonds have a low, but non-zero correlation with stocks.  Bonds reduce expected portfolio volatility at the expense of a lower expected return because bonds are more senior in the capital structure than equity.  That's basically all you need to know about bonds.

                I see no reason to go with a low volatility or high dividend ETF.  Depending on the fund, you are weighting portfolio in ways you likely don't understand (i.e. large caps, financials, risky assets, etc.).

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                • #9
                  What is your friend's goal with owning bonds or high dividend funds? They are pretty different products. The best portfolio depends on what you are trying to achieve.

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                  • #10
                    @DD.    Think of divys as a subset of stocks that happen to throw off higher  dividends.  Their popularity relative to the whole stock market varies slightly from the whole, thus giving slight noncorrelation. Divys were especially popular during 2016 when investors were frustrated  with low bond rates. I use DIV in one of my taxable accounts.

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                    • #11


                      It may sounds counter indicative but index funds don’t pay dividends out to investors in that fund. Mutual funds do. Index funds track a basket of stocks, currencies, etc. it’s pure price driven.
                      Click to expand...


                      Did you mean counterintuitive?

                      Either way, an index fund is a type of mutual fund. They are not mutually exclusive. And index funds do indeed pay dividends. Value funds tend to pay higher dividends than growth funds.

                      Total Stock Market (VTSAX) current yield (TTM = Trailing Twelve Month) is 1.88%. S&P 500 (VFIAX) TTM yield is 1.84%.

                      I don't see the benefit of high yield funds in an HSA or retirement account. You're just going to reinvest the dividends, right?

                       

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                      • #12
                        I used to own Vanguard Dividend Growth and High Dividend Yield funds in my taxable account while I was a resident (2013-2017). In 4 years they doubled in value. Recently sold them and bought International Stock index Admiral Shares as it makes more sense in my current portfolio and tax bracket.

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                        • #13
                          Income generating sort of like bonds, but usually different risk pool of type of company/institution --- but same kind of bucket as taxable corporate bonds

                           

                          Ie;  tax deferred accounts of low tax bracket (for taxable) for income 'safe haven' generation.

                          I have a decent amount in Roth portfolio with utility stocks and 'daily essentials' stock

                          --waiting for the Honest company to ever to public to invest---think that would be long term winner in nice little niche.

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                          • #14
                            https://www.whitecoatinvestor.com/forums/users/financial_consultant/replies/

                            Ghost!

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                            • #15
                              I'll provide a little background and then answer your specific question.

                              Background on high-dividend stocks: High-dividend stocks are just a subset of the overall market.  They are generally older, slower-growing companies -- companies like Procter & Gamble, Exxon and the tobacco companies -- but there is no special magic to them.  In other words, like any subset of the market, they will go in and out of favor in different time periods.  As a rule of thumb, during bull markets, high-dividend stocks will underperform, because investors will be chasing lower-dividend, higher-growth stocks.  And, during bear markets, high-dividend stocks will tend to outperform because of their relative safety.  For that reason, you can't say definitively that high-dividend stocks are "better" to own; they will just be better during certain parts of the economic cycle.

                              My suggestion: I see no particular need to own a fund that invests in subsets of the market, for two reasons: (1) It makes your job as a self-directed investor harder.  You'd need to decide how much to allocate to this new fund and then factor it in when you do rebalancing, etc.  (2) Specialized funds are generally more expensive than broadly-diversified funds.  For example, Vanguard's S&P 500 ETF (VOO) costs half of what their high-dividend ETF (VYM) costs.  Given a choice, I would opt for keeping things simple for yourself.

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