Total Returns Beats Dividend Focus

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bkweathe
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Total Returns Beats Dividend Focus

Post by bkweathe »

I'm pretty sure that Vanguard wrote a white paper or something a few years ago showing why aiming for total returns is better than focusing on dividends. Anybody know where I can find it? Anything similar in the Bogleheads wiki?

Brad
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Eagle33
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Re: Total Returns Beats Dividend Focus

Post by Eagle33 »

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Re: Total Returns Beats Dividend Focus

Post by Vanguard Fan 1367 »

Vanguard’s Total Stock Market Fund VTI has outperformed their High Dividend Yield ETF, VYM. That you can research. Sorry I can’t find the article you want.
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alex_686
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Re: Total Returns Beats Dividend Focus

Post by alex_686 »

Is $1 in dividend returns more valuable than $1 in capital? Of course not, a dollar is a dollar is a dollar. The math on this is pretty tight.

I am not sure you are going to find a white paper. Total Returns are deeply embedded in investment theory. You could start with Miller & Modigliani's "Capital Structure Irrelevance Principle" (a.k.a. 'Dividend Irrelevance Theory') Written in 1958 and won the Nobel prize in the 80s. This was formalized Association for Investment Management and Research (AMIR, now CFA Institute)–Performance Presentation Standards (PPS, now Global Investment Performance Standards (GIPS) back in the 1980s. GIPS is the gold standard these days. Let me use dividends to calculate return and I can cheat a dozen different ways.

This being said, we may be talking about 2 different things. Total Returns is a way to think about your investment returns. Absolutely rock solid. Dividends is a method to generate return. While it is intuitive, it is built on a pile of sand. Free Cash Flow to Equity (FCFE) is the solid choice here.
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GT99
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Re: Total Returns Beats Dividend Focus

Post by GT99 »

It is that simple...but it's not that simple. Dividend stocks typically have less volatility, so you could use VYM to reduce risk a bit without increasing your bond allocation. I don't think this is a bad strategy for someone approaching or in retirement. To be clear, I'm not saying it's a 1:1 replacement for bond funds. Not even close. Just smaller way to reduce some risk.
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Re: Total Returns Beats Dividend Focus

Post by alex_686 »

GT99 wrote: Tue Jun 30, 2020 8:18 pm Dividend stocks typically have less volatility....
I am not so sure about this. A good chunk of dividend stocks lay on the "Value Factor" side of things, and value tends to be more risky. That being said, a good chunk also lays on "Quality Factor" side - where this is kind of true.

Or better yet, invest in either Value or Quality. Dividend is not a reliable indicator.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
sycamore
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Re: Total Returns Beats Dividend Focus

Post by sycamore »

There's also https://personal.vanguard.com/pdf/ISGADOS.pdf from a few years ago that looks at different kinds of dividend focused investing.

Here's its conclusion
We explored high-dividend-yielding equities and dividend growth equities, two popular forms of dividend investing that have been gaining increasing attention given low interest rates and a record of strong historical performance.

Our research indicates that, absent beneficial tax treatments, dividend-oriented equity strategies are best viewed from a total-return perspective, taking into consideration returns stemming from both income and capital appreciation. Substituting dividend-oriented equities also significantly raises a portfolio’s risk profile when used in place of fixed income and diminishes
its downside protection. Dividend-oriented equities also tend to have greater interest rate sensitivity (that is, duration) than other equities, making their performance more susceptible to changes in bond yields.

The strong historical risk-adjusted performance of dividend-oriented strategies has been time-period- dependent, with much of their outperformance realized during the technology stock bear market of 1999–2000. The performance of dividend-oriented strategies has also been highly dependent on a handful of equity factors. Emphasizing these strategies therefore reflects, in effect, a conviction that these factors will continue to outperform.
RAchip
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Re: Total Returns Beats Dividend Focus

Post by RAchip »

I think its complicated.

Lets assume you want income of 4% of initial portfolio value and you want it to grow annually with inflation. What if you could assemble a reasonably diversified portfolio of 20 or so stocks that collectively pay dividends of 4% and those dividends are expected to grow annually to outpace inflation (or at least match it). This is do-able (I have done it). Would the total return from that approach exceed the total return of buying an S&P500 index fund taking the 2% (or so) dividend AND selling 2% every year?

It would be pretty complex to do that calculation and would surely depend on a lot of timing issues and how good (or lucky) you are in picking your 20 stocks. All I can say is that I have been following this “dividend” approach and it is working well for me. My dividend growth has been tremendous. The unrealized capital gains are fantastic. The simplicity of never needing to sell is really nice. Would I have more “total return” if I had followed the second approach above? I dont know but my dividends are currently way above 4% of initial portfolio value plus annual inflation. Also my stocks are all well known established blue chip companies (no REIT’s or MLP’s or gimmick stocks).

My approach does take some patience. You probably cant assemble you portfolio in one day. For example, UPS will occasionally trade at a price at which its dividend exceeds 4% but its pretty rare. Every stock does not need a 4% plus dividend however. It takes some thought and patience and effort. Bit once you get the portfolio built its pretty low maintenance.

To be clear, I am trying to maximize total return. But I need income. I think the dividend approach is a better way to produce fairly reliable, growing income AND capital gains than an index approach coupled with periodic stock sales.
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Re: Total Returns Beats Dividend Focus

Post by firebirdparts »

sycamore wrote: Tue Jun 30, 2020 8:32 pm There's also https://personal.vanguard.com/pdf/ISGADOS.pdf from a few years ago that looks at different kinds of dividend focused investing.

Here's its conclusion
They didn't seem to reach a conclusion, did they? I'm surprised.
This time is the same
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Re: Total Returns Beats Dividend Focus

Post by sycamore »

firebirdparts wrote: Wed Jul 01, 2020 11:18 am
sycamore wrote: Tue Jun 30, 2020 8:32 pm There's also https://personal.vanguard.com/pdf/ISGADOS.pdf from a few years ago that looks at different kinds of dividend focused investing.

Here's its conclusion
They didn't seem to reach a conclusion, did they? I'm surprised.
They didn't reach one conclusion, no, but they did reach several conclusions :) Most of them are boglehead-ish: don't treat dividend stocks as a substitute for fixed income; any out-performance they had was due to specific time periods so don't count on a subset of stocks outperforming a total market fund; don't focus just on yield, focus on total return.
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Re: Total Returns Beats Dividend Focus

Post by abuss368 »

Vanguard Fan 1367 wrote: Tue Jun 30, 2020 7:48 pm Vanguard’s Total Stock Market Fund VTI has outperformed their High Dividend Yield ETF, VYM. That you can research. Sorry I can’t find the article you want.
Correct as more of the return for High Dividend Yield is related to dividends rather than capital gains. Over time, the two funds closely mirror each other. Most of the top 10 holdings of each fund are the same.
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sycamore
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Re: Total Returns Beats Dividend Focus

Post by sycamore »

abuss368 wrote: Wed Jul 01, 2020 12:19 pm
Vanguard Fan 1367 wrote: Tue Jun 30, 2020 7:48 pm Vanguard’s Total Stock Market Fund VTI has outperformed their High Dividend Yield ETF, VYM. That you can research. Sorry I can’t find the article you want.
Correct as more of the return for High Dividend Yield is related to dividends rather than capital gains. Over time, the two funds closely mirror each other. Most of the top 10 holdings of each fund are the same.
To clarify, only Johnson & Johnson is in the top 10 of each:
https://investor.vanguard.com/etf/profile/portfolio/vym
https://investor.vanguard.com/etf/profile/portfolio/vti
VYM is rather tilted to Value.
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Re: Total Returns Beats Dividend Focus

Post by abuss368 »

sycamore wrote: Wed Jul 01, 2020 12:46 pm
abuss368 wrote: Wed Jul 01, 2020 12:19 pm
Vanguard Fan 1367 wrote: Tue Jun 30, 2020 7:48 pm Vanguard’s Total Stock Market Fund VTI has outperformed their High Dividend Yield ETF, VYM. That you can research. Sorry I can’t find the article you want.
Correct as more of the return for High Dividend Yield is related to dividends rather than capital gains. Over time, the two funds closely mirror each other. Most of the top 10 holdings of each fund are the same.
To clarify, only Johnson & Johnson is in the top 10 of each:
https://investor.vanguard.com/etf/profile/portfolio/vym
https://investor.vanguard.com/etf/profile/portfolio/vti
VYM is rather tilted to Value.
As expected as the older more mature companies would pay the higher dividend compared to growth companies.
John C. Bogle: “Simplicity is the master key to financial success."
GT99
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Re: Total Returns Beats Dividend Focus

Post by GT99 »

alex_686 wrote: Tue Jun 30, 2020 8:27 pm
GT99 wrote: Tue Jun 30, 2020 8:18 pm Dividend stocks typically have less volatility....
I am not so sure about this. A good chunk of dividend stocks lay on the "Value Factor" side of things, and value tends to be more risky. That being said, a good chunk also lays on "Quality Factor" side - where this is kind of true.

Or better yet, invest in either Value or Quality. Dividend is not a reliable indicator.
It's not perfect, but it's broadly true. Using VTI and VYM, VTI has a Beta of 1.04. VYM, which is largely VTI minus stocks that don't pay a dividend, is 0.93. Not a huge difference, but not trivial either, especially considering everything in VYM is in VTI.
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Re: Total Returns Beats Dividend Focus

Post by hale2 »

RAchip wrote: Wed Jul 01, 2020 9:51 am I think its complicated.

Lets assume you want income of 4% of initial portfolio value and you want it to grow annually with inflation. What if you could assemble a reasonably diversified portfolio of 20 or so stocks that collectively pay dividends of 4% and those dividends are expected to grow annually to outpace inflation (or at least match it). This is do-able (I have done it). Would the total return from that approach exceed the total return of buying an S&P500 index fund taking the 2% (or so) dividend AND selling 2% every year?

It would be pretty complex to do that calculation and would surely depend on a lot of timing issues and how good (or lucky) you are in picking your 20 stocks. All I can say is that I have been following this “dividend” approach and it is working well for me. My dividend growth has been tremendous. The unrealized capital gains are fantastic. The simplicity of never needing to sell is really nice. Would I have more “total return” if I had followed the second approach above? I dont know but my dividends are currently way above 4% of initial portfolio value plus annual inflation. Also my stocks are all well known established blue chip companies (no REIT’s or MLP’s or gimmick stocks).

My approach does take some patience. You probably cant assemble you portfolio in one day. For example, UPS will occasionally trade at a price at which its dividend exceeds 4% but its pretty rare. Every stock does not need a 4% plus dividend however. It takes some thought and patience and effort. Bit once you get the portfolio built its pretty low maintenance.

To be clear, I am trying to maximize total return. But I need income. I think the dividend approach is a better way to produce fairly reliable, growing income AND capital gains than an index approach coupled with periodic stock sales.
How did you come up with your 20 or so stocks? Have you stuck with all of your original choices? I use VIG which I'm hoping is accomplishing the same thing you have done, but am open to other options.
YRT70
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Re: Total Returns Beats Dividend Focus

Post by YRT70 »

bkweathe wrote: Tue Jun 30, 2020 4:57 pm I'm pretty sure that Vanguard wrote a white paper or something a few years ago showing why aiming for total returns is better than focusing on dividends. Anybody know where I can find it? Anything similar in the Bogleheads wiki?

Brad
This 12 minute video by Ben Felix explains it very well and contains references to several scientific papers.

The irrelevance of dividends
https://youtube.com/watch?v=f5j9v9dfinQ
RAchip
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Re: Total Returns Beats Dividend Focus

Post by RAchip »

hale2 wrote: Wed Jul 01, 2020 8:24 pm
RAchip wrote: Wed Jul 01, 2020 9:51 am I think its complicated.

Lets assume you want income of 4% of initial portfolio value and you want it to grow annually with inflation. What if you could assemble a reasonably diversified portfolio of 20 or so stocks that collectively pay dividends of 4% and those dividends are expected to grow annually to outpace inflation (or at least match it). This is do-able (I have done it). Would the total return from that approach exceed the total return of buying an S&P500 index fund taking the 2% (or so) dividend AND selling 2% every year?

It would be pretty complex to do that calculation and would surely depend on a lot of timing issues and how good (or lucky) you are in picking your 20 stocks. All I can say is that I have been following this “dividend” approach and it is working well for me. My dividend growth has been tremendous. The unrealized capital gains are fantastic. The simplicity of never needing to sell is really nice. Would I have more “total return” if I had followed the second approach above? I dont know but my dividends are currently way above 4% of initial portfolio value plus annual inflation. Also my stocks are all well known established blue chip companies (no REIT’s or MLP’s or gimmick stocks).

My approach does take some patience. You probably cant assemble you portfolio in one day. For example, UPS will occasionally trade at a price at which its dividend exceeds 4% but its pretty rare. Every stock does not need a 4% plus dividend however. It takes some thought and patience and effort. Bit once you get the portfolio built its pretty low maintenance.

To be clear, I am trying to maximize total return. But I need income. I think the dividend approach is a better way to produce fairly reliable, growing income AND capital gains than an index approach coupled with periodic stock sales.
How did you come up with your 20 or so stocks? Have you stuck with all of your original choices? I use VIG which I'm hoping is accomplishing the same thing you have done, but am open to other options.

I put some work in studying. I have made small changes over the years but mostly I just add to positions when they become attractive. If you stay on top of things you can get lucky. I had been waiting for a chance to buy MMM. In March MMM’s price dropped to about $118 for a short time (5% yield). That was a back up the truck moment for me. I think its important to have a long term view and not panic if the road gets bumpy.
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Re: Total Returns Beats Dividend Focus

Post by Vanguard Fan 1367 »

RAchip wrote: Thu Jul 02, 2020 6:50 am I think its important to have a long term view and not panic if the road gets bumpy.
Great advice! I appreciate my fellow forum members talking about their reactions during the big drop this past winter. Some did panic.
John Bogle: "It's amazing how difficult it is for a man to understand something if he's paid a small fortune not to understand it."
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