Interesting but somewhat cherry picked blog about dividend vs index investing

[RetireJapan]

Just read this blog post (Japanese): https://haitou-life.com/which-asset-would-you-like/

The post compares buying index funds vs. buying 10 dividend paying companies.

The author is a dividend blogger, so clearly prefers dividend growth investing.

I feel the numbers are slightly cherry picked (index funds get a projected 6% annual return, dividend shares get either 5% share price increase/5% dividend growth or 3% share price increase/3% dividend growth).

The author concludes that clearly dividend growth investing is better, but seems to ignore:

1. the risk of the chosen companies underperforming, cutting dividends, or going bankrupt
2. the option of investing in index funds for growth, then selling them and replacing with income in retirement

Any thoughts? It struck me this might make for an interesting blog post.

[TokyoBoglehead]

Just read this blog post (Japanese): https://haitou-life.com/which-asset-would-you-like/

The post compares buying index funds vs. buying 10 dividend paying companies.

The author is a dividend blogger, so clearly prefers dividend growth investing.

I feel the numbers are slightly cherry picked (index funds get a projected 6% annual return, dividend shares get either 5% share price increase/5% dividend growth or 3% share price increase/3% dividend growth).

The author concludes that clearly dividend growth investing is better, but seems to ignore:

1. the risk of the chosen companies underperforming, cutting dividends, or going bankrupt
2. the option of investing in index funds for growth, then selling them and replacing with income in retirement

Any thoughts? It struck me this might make for an interesting blog post.

"Show me your receipts", is my response. Did he really pull it off? If so, great, he was compensated for the increased risk and extra taxes.

However, virtually no average Joe has the training that would allow them to choose a "good" company. Lots of hubris etc etc

Japan has made passive investing dead easy, yet everyone is convinced they can do better, I've seen few success stories.

Dividend investing is more "intuitive" to many people and they are seduced by dividends and the almighty "cash flow".

[TBS]

As Japanese financial blogs go, this one is as bad as they come. It assumes a 6% total annual return for S&P500 index fund. Then for dividend stocks it assumes either a 9% total annual return (calculations 1 & 3), or a 7% total annual return (calculation 2). It runs the numbers, and then just concludes dividend stocks are better.

But these numbers are, quite literally, made up.

To inject some reality, the average annual return of S&P500 TR yen-based since 1988 is 13%.

And now I want the 30 mins of my life I put into reading this back @RetireJapan

[TBS]

This topic reminded me of this James Shack video: https://www.youtube.com/watch?v=ddBRWQ907Uo (The No.1 Strategy For Retirement Income...)

The psychological reasons for why people prefer dividends are very strong. The research he discusses in the video even suggests dividend portfolios, despite irrational from a pure returns standpoint, are a good option in practice for many. The reason is people's aversion to selling down capital means they will likely end up enjoying less of their money in retirement than someone with a dividend & fixed-income heavy portfolio. Because the latter probably spend down more of their portfolio before passing away, despite the portfolio's tax inefficiencies and lower flexibility.

As much as I emphasize making rational investment decisions on here, this is one area that resonates strongly with me. An optimal strategy is no use to someone who won't implement it or whose quality of retirement will be degraded by the mental stress it entails.

[RetireJapan]

And now I want the 30 mins of my life I put into reading this back @RetireJapan

I apologise. It really was unforgivable to inflict this experience on you. There is nothing I can write to assuage my guilt and responsibility

[RetireJapan]

As much as I emphasize making rational investment decisions on here, this is one area that resonates strongly with me. An optimal strategy is no use to someone who won't implement it or whose quality of retirement will be degraded by the mental stress it entails.

Absolutely. I had a dividend element to my portfolio in the past and my wife still has about half her investments in dividend payers (I figured it would be easier for her to just get dividends if something happened to me).

But it makes more sense to me now to invest with indexes for growth, then sell and switch to dividend payers later if you want that in retirement.

Starting off 100% dividend focused in your 20s seems like a bit of a waste.

[VG1]

I compared the performance of two ETFs, DVY and SPY, which respectively invest in US dividend stocks and track the S&P 500 index. The performance analysis includes the assumption of dividend reinvestment. DVY holds the longest track record among dividend stocks ETFs.

The comparison period spans from December 2003 until the present, as there is no available data for DVY prior to that date.

Here are the performance metrics for SPY: Annualized return of 9.36%, volatility of 14.81%, and a Sharpe ratio of 0.59. For DVY, the corresponding metrics are a return of 7.65%, volatility of 14.97%, and a Sharpe ratio of 0.48.

Over the analyzed period, the S&P 500 proves to be the clear winner. Although 20 years of data may be considered relatively short, I don't have data for a longer period.

Regarding this topic, there is an interesting video by Ben Felix, a portfolio manager who supports his statements with academic research.

https://www.youtube.com/watch?v=f5j9v9dfinQ



Having said that, I agree with TBS that when it comes to investment, it is often not just about figures and theory.

[TBS]

Here are the performance metrics for SPY: Annualized return of 9.36%, volatility of 14.81%, and a Sharpe ratio of 0.59. For DVY, the corresponding metrics are a return of 7.65%, volatility of 14.97%, and a Sharpe ratio of 0.48.

Over the analyzed period, the S&P 500 proves to be the clear winner. Although 20 years of data may be considered relatively short, I don't have data for a longer period.

Nice, thanks for sharing this. I suspect the lower return of DVY is partly explained by tech stocks which have fueled much of the growth of the S&P500 in recent times. Tech stocks are notoriously low, or zero, dividend payers and are for the most part absent from DVY.

And excellent video.

[TokyoBoglehead]

And now I want the 30 mins of my life I put into reading this back @RetireJapan

I apologise. It really was unforgivable to inflict this experience on you. There is nothing I can write to assuage my guilt and responsibility

It's easy to win when you choose your own benchmark.

Like all those active managers who benchmark themselves to the Russell 2000, a famously underperforming index.