Dividend index funds versus total return approach

[da8s0859q]

All,

Dabbling in Vanguard index funds to learn while slamming my residual med school loans every month.

Basically, looking at Vanguard's high dividend yield investor share fund (VHDYX), I have a modest amount of money that I put in there just recently and which has grown a bit with the market movement in the last few weeks -- again, more to learn and to get my feet wet as a newer attending.

I've read quite a few things here and on Bogleheads as far as the arguments for/against dividend-based approaches.

Seeing a little extra cash would, of course, be nice, but it's not like I'll be sinking the kind of money into this in the next 1-2 years to make that particularly feasible.

The details are all feeling mushed in my head with everything else I've been doing/learning about such things. That said -- better to leave as is or migrate to one of their other highly reviewed index funds -- the 500 fund (VFINX) or total stock market fund (VTSMX), perhaps?

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[Plastikos]

In a taxable account you'd want to avoid dividends as they have quite a tax drag at physician income levels.

In a tax-deferred account you dont have to worry about that, however I dont think its some crazy amazing way of doing things. It will be fine if you choose and stick to that style, as will be true of anything else. When you realize money is fungible, dividends come out of the companys value, etc...it starts to make less sense. First, this isnt 1974 and no one has heard much about the aristocrats and the magic of dividends, everyone knows and the cult of dividend followers is large, thus any perceived benefit is likely gone which was value but now that they are bid up thats over. This is true of many "factors" btw. Also a dividend ETF/mutual fund is not a good structure to do that kind of investing because of the way they extract the ER is from the dividends I believe (been a while) which drags on return of course.

In short, yes you're better off not worrying about it and just getting a total market fund (VTI, the etf version total market). It has dividends as well. You'll eventually have a mess of them anyway. The american market has rationally (poor tax wise for company/shareholders) been moving away from dividends for decades and I expect it will continue unless something changes.

 

[sazerac]

Agreed. Dividend funds are a slice of the market. The whole point of index investing is to own everything and not worry about whether dividends are going to do better or worse this year versus something else. Surely something will outperform, and if you own everything you will own that too.

 

[ThoracicGuy]

All,

Dabbling in Vanguard index funds to learn while slamming my residual med school loans every month.

Basically, looking at Vanguard's high dividend yield investor share fund (VHDYX), I have a modest amount of money that I put in there just recently and which has grown a bit with the market movement in the last few weeks -- again, more to learn and to get my feet wet as a newer attending.

I've read quite a few things here and on Bogleheads as far as the arguments for/against dividend-based approaches.

Seeing a little extra cash would, of course, be nice, but it's not like I'll be sinking the kind of money into this in the next 1-2 years to make that particularly feasible.

The details are all feeling mushed in my head with everything else I've been doing/learning about such things. That said -- better to leave as is or migrate to one of their other highly reviewed index funds -- the 500 fund (VFINX) or total stock market fund (VTSMX), perhaps?

I agree with @sazerac and @Plastikos here. For a taxable account, you are in for the long term and you don't really want those dividends being kicked out. Getting VTSMX or VTSAX when you have enough money invested is a better fund for investing. You want those dividends that are kicked out to be reinvested as well. That's how your money grows.

 

[DrCommonSense]

Agreed. Dividend funds are a slice of the market. The whole point of index investing is to own everything and not worry about whether dividends are going to do better or worse this year versus something else. Surely something will outperform, and if you own everything you will own that too.

Actually good dividend index funds and dividend stocks have outperformed the SP500 when dividends are included for total returns for the last few decades.

 

[sum dude]

Even the Vanguard S&P500 ETF (VOO) has 2% dividend (Vanguard Dividend fund 2.9%) . Above are right that you get smacked with physician salary and dividends. If you are trying to avoid dividends, you can always get a small cap Vanguard (eg Extended market) or other growth ETF, which tends to do better in bulls (but worse in bears), but has low dividends. And if you can't decide, just get the Wiltshire 5000 equivalent (VTI for vanguard).

 

[DrCommonSense]

Even the Vanguard S&P500 ETF (VOO) has 2% dividend (Vanguard Dividend fund 2.9%) . Above are right that you get smacked with physician salary and dividends. If you are trying to avoid dividends, you can always get a small cap Vanguard (eg Extended market) or other growth ETF, which tends to do better in bulls (but worse in bears), but has low dividends. And if you can't decide, just get the Wiltshire 5000 equivalent (VTI for vanguard).

Are qualified dividends taxed at the same rate as income though?

 

[sum dude]

Qualified is 15-20% depending on tax bracket. Interestingly, not all ETF's or funds have the same amount of qualified dividends
http://socialize.morningstar.com/newsocialize/forums/t/138408.aspx

 

[CatsAreFunnerThanDogs]

i recommend the one that result in the least amount of work for you. not kidding. too much maintenance means you will forget. if you do dividend, remember to let it self invest. otherwise, the dividends just sit there and you forget about (and you will!)

 

[goodoldalky]

Seeing a little extra cash would, of course, be nice, but it's not like I'll be sinking the kind of money into this in the next 1-2 years to make that particularly feasible.

If you are cashing out your dividends, you are killing your returns. Dividends should be reinvested unless you need the money (i.e.: are retired and living off of the dividends). To crudely oversimplify the issue, you have a choice of two stocks/funds: One with no yield, and capital appreciation of 6% a year, and one with a 3% dividend, with capital appreciation of 3% per year. You will pay taxes on dividends as pointed out previously. There are nuances to this, but my main argument is that dividends should be reinvested automatically if feasible. It sounds as though you have thoughts of getting significant income from your dividends at some point, this is unlikely to happen if you cash out dividends from the start.