Dividend stocks or index?

[RetireJapan]

I'm thinking about next year's NISA allocation. The two options are:

1. buy dividend stocks
2. buy indexes

I enjoy receiving dividends, but it seems as though indexes are probably a more sensible solution. Any thoughts? I am on the fence now, and could go with one, the other, or a mix of the two

[kanga]

disclaimer: I'm a big index proponent.
lets quickly look (imo) at the risks of individual shares.

1) company drops in value
2) financial crisis

with an index, at least you can remove risk no 1.. it'll also give you the possibility to diversify across borders, and growth/defensive assets.

With shares, theoretically you could also see some more gains (if you pick right)
the question is that, banks and financial institutions do this for a living, and more often than not fail at it.
can we really see what everyone else can't? answer is no.

[RetireJapan]

Intellectually, I know indexes are probably a better bet in the long-term.

Emotionally, I love getting dividends and seeing them grow over time.

Individual dividend shares tend to have a higher yield than an index, and lower costs to own. Index will probably grow more.

Continuing with a mix (we own mostly indexes) might be a way to hit both

[TokyoSophia]

My main investing strategy is dividend growth investing. Basically a company that can continue to increase its dividend longterm is a company whose share price and value is also rising. So you benefit in two ways: the stock price will increase and your dividend income will also increase. My best performing stock so far is actually the Japanese listed BP Castrol, which now produces a 15% dividend on the original average purchase price I paid. My goal is to generate an average of 200,000 to 300,000 yen in dividend income per month, without having to touch my principal. I'm already at an average of 40,000 yen per month (15,000 up on last year) so with 24 years left to go until retirement this should be very doable. So, I would say definitely individual dividend stocks, particularly in a NISA account where you will see the tax-free dividend benefits more.

[RetireJapan]

Thanks, TS. Some good points.

I actually added a section to the NISA Guide based on this

Given that a fair amount of our portfolio is already indexed (THEO, iDeCo, and my wife's investments), it makes sense for me to play with dividend growth shares in my NISA.

[StockBeard]

I think every time it's been studied, the idea of just using dividends and not touching the capital is another way of saying "I don't trust the 4% rule". I totally understand the emotional impact of touching the capital, but I also think people should read the historical data and not be overly conservative (which probably leads to less efficient choices anyway, because now you have to choose individual companies, make bets on their future dividends, etc.... things we don't have to do when we go with "dumb" index strategies).

In practice, just counting on the dividends is probably overly conservative.

Good interview here of Michael Kitces, who states for a long time retirement horizon, 3.5% is fine: https://www.madfientist.com/michael-kitces-interview/

[RetireJapan]

I think every time it's been studied, the idea of just using dividends and not touching the capital is another way of saying "I don't trust the 4% rule". I totally understand the emotional impact of touching the capital, but I also think people should read the historical data and not be overly conservative (which probably leads to less efficient choices anyway, because now you have to choose individual companies, make bets on their future dividends, etc.... things we don't have to do when we go with "dumb" index strategies).

In practice, just counting on the dividends is probably overly conservative.

Good interview here of Michael Kitces, who states for a long time retirement horizon, 3.5% is fine: https://www.madfientist.com/michael-kitces-interview/

Completely agree. This is interesting too: https://earlyretirementdude.com/4-rule- ... ity-study/

And I read a Reddit post by the guy that popularised the 4% rule saying 4.5% is probably better as long as you have some flexibility to reduce your spending.

At the end of the day though, the most important thing is that you are comfortable with your approach. I am comfortable with complete overkill

[robster]

Intellectually, I know indexes are probably a better bet in the long-term.

Emotionally, I love getting dividends and seeing them grow over time.

Individual dividend shares tend to have a higher yield than an index, and lower costs to own. Index will probably grow more.

Continuing with a mix (we own mostly indexes) might be a way to hit both

Some rookie questions here :
1)don't some indexes pay dividends? Or is it the case that they pay dividends, but they tend to be low compared to individual stocks...?
2) should we pay much attention to dividends paid on indexes, or is past dividend payment no indication of future payments? (in a separate feed you had mentioned what the yield was on a certain index, and i wondered if this is a constant, or just the latest dividend?)
And would it be wiser to give higher priority to low expense ratio, rather than potential dividends?
3) how do you see the dividends paid on index funds? Maybe it is because i have not yet set up an account, but i am having trouble finding such information on SBI or Rakuten WRT index funds.

Thanks.

[RetireJapan]

Some rookie questions here :
1)don't some indexes pay dividends? Or is it the case that they pay dividends, but they tend to be low compared to individual stocks...?
2) should we pay much attention to dividends paid on indexes, or is past dividend payment no indication of future payments? (in a separate feed you had mentioned what the yield was on a certain index, and i wondered if this is a constant, or just the latest dividend?)
And would it be wiser to give higher priority to low expense ratio, rather than potential dividends?
3) how do you see the dividends paid on index funds? Maybe it is because i have not yet set up an account, but i am having trouble finding such information on SBI or Rakuten WRT index funds.

Hi robster

Good questions. Here's my take on them.

1) Yes, index yields tend to be lower than dividend growth share yields. This is because many of the companies in the index won't pay a dividend, or will pay a low one. However, by owning growth shares in the broader index, you may see more total profit in the long run by investing in index funds. There is also the problem of taxes (distributed dividends are taxed, while unrealised capital gains are not). Thus indexes can be more tax-efficient than dividend growth shares.
2) Not to the extent of worrying about it
Dividends tend to increase over time. This is probably true of indexes too. Of course the price also goes up, so the yield will stay roughly similar. Some companies may cut or reduce their dividend however.
3) I tend to look at Google Finance or Yahoo Finance

[robster]

Thanks RJ.
I see from looking at the 12-month historical data on Yahoo Finance that the dividends paid quarterly on VXUS are varied, I suppose as a result of performance of all the stocks that quarter. The last 4 quarterly dividends total 1.4%.
So the 2.5% Yield quoted in the summary is based on an average of a different period, or is it a rough ballpark figure that the fund aims for but does not necessarily achieve every year?

I hadn't been paying much attention to dividends until now as I am only interested in index funds, but anything over 1% i guess is significant, (even though it be taxed) and so if the published yield figure is something that you can expect to receive, or something close to it, it should then be a factor in considering which funds to buy, even if your main objective for buying index funds is the long-term growth.
Is that logic correct?