Submitted by Flameboy465 t3_z966si in personalfinance
Hi there! So basically im planning to invest around 1,000 into my Roth IRA and I already have a 3 portfolio strategy going. I wanted to see if investing in a dividend ETF would be a good idea to hedge against inflation or if I should invest in something else? let me know what you think!
>What’s wrong with the three fund portfolio?
indifferent to valuation, at least as commonly practiced, and valuation is probably the most critical part of long term ROI. if one chose to follow John Boggle's advice they would boost bond allocation above Bogle's minimum 20% as Shiller p/e gets elevated and would thus take some action based on valuation. but this part of his advice is commonly ignored from what I've seen on reddit and the Bogleheads forums.
it's dominated by large-cap growth, when small cap and value stocks tend to give the best long-term results over long periods.
>Dividends aren’t anything special
on the contrary
>In the full dataset [CRSP database of US stock returns 1928 to 2017] there have been 71 periods of 20 consecutive calendar years. Table 2 on the following page shows how the six portfolios measure up on annualized returns and standard deviations over the 20-year periods. Similar to the full 90-year sample, we find a direct relationship between dividend yield and total return. And again, volatility for dividend paying portfolios was lower than that of non-payers. https://www.heartlandadvisors.com/media/Insights/White-Papers/Dividends-A-Review-of-Historical-Returns.pdf
or
>To demonstrate the power of dividends and their impact on performance, consider some research done by Professor [Jeremy] Siegel in his 2005 book, The Future for Investors. Professor Siegel broke down the performance of the S&P 500 dividend-paying stocks into quintiles, illustrating that focusing on only those stocks that provided the highest levels of dividends had a dramatic impact on performance—and risk.
>As you can see in figure 1, the highest quintile outperformed the broad S&P 500 Index by over 1.3% per year, which turned into nearly 141% outperformance over time. And it did this with a lower beta. Even the second quintile outperformed the S&P 500 by over 1.5% per year, for a total of more than 159% outperformance over time, with less risk.
but what does one of the top finance professors at one of the top business schools in the world know?
Oh hey buddy, where you been?
>As you can see in figure 1, the highest quintile outperformed the broad S&P 500 Index by over 1.3% per year, which turned into nearly 141% outperformance over time. And it did this with a lower beta. Even the second quintile outperformed the S&P 500 by over 1.5% per year, for a total of more than 159% outperformance over time, with less risk.
>but what does one of the top finance professors at one of the top business schools in the world know?
I mean his chart shows that three of the five quintiles underperform the sp500.
This begs the question then, if its so easy to beat the market by picking dividend paying companies, why doesn't every (or at least many) fund manager(s) beat the market?
I'm not saying eschew dividends, I'm saying that whatever most retail investors do is probably going to be wrong, so go with the least wrong option (buying the market)
I am not understanding why dividends would be a hedge against inflation. What is your reasoning there? In what way do dividends hedge inflation?
I'm guessing you might just be misunderstanding what dividends are. A dividend fund is going to have stock holdings in companies that provide a dividend or they are going to hold stock and then artificially generate a dividend from those holdings by doing things like covered calls. In either case these are still stock holdings, they can still very much go down. There isn't anything about dividends that is risk free in some way nor is it at all related to the inflation rate.
Imagine you had two funds. Both of these funds invested in companies within a sector that perform exactly the same in terms of their performance. Fund A invests in companies that do not provide a dividend, Fund B invests in companies that do. You invest $1000 in each.
Fund A gives a 10% return which is realized in growth. You end up with $1100.Fund B gives a 10% return which is realized in 6% growth and a 4% dividend. You end up with $1100.
When a company issues a dividend it comes out of their value. If there valuation has their total return at 10% and they issue a 4% dividend that means that their returns came 6% from growth and 4% from the dividend. The 4% isn't on top of the 10%, its part of it. You can see this in stock valuation. If a companys stock is valued at $100/share and it issues a 4% dividend then its stock valuation will drop to $96/share.
Within your three fund portfolio are going to be companies that issue dividends and thus those funds (at least the non-bond funds) will give you a dividend as part of their total return. Selecting a dividend fund would just mean that more of the return is in the form of a dividend, not that the return is higher.
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Are you worried a 3-fund portfolio won't outrun inflation on its own?
Do you have a reason to believe that dividends would be a hedge against inflation? If so, what is it? Because I don't know of any. Perhaps if you explain why you think so, we could respond.
The only other thing I'd say is that, while it's great you're getting started on your Roth, 3 portfolios is already a large number to be dividing 1000 by, and adding a 4th would seem to add more fiddling than could possibly be worth it. If you value your time, you'll cost yourself more in lost time than you would make by maximizing the average gain of diversification.
When you're starting out, by far the most important factor in your future wealth is how much you contribute, not the exact allocation you use. Personally, I'd just go with one index fund until I got to about $10k.
How do you think dividends would help you hedge against inflation?
Why is a dividend fund a hedge against inflation?
I'm not aware of any data on dividend stocks and inflation.
however,
(a) there's strong data showing that dividend stocks have advantages in bear markets (when the market declines over 20%). professor Jeremy Siegel has called dividend stocks 'bear market protectors' for this reason. you can see this phenomenon happening this year. the overall US market is down about 16% so far this year, but dividend oriented ETFs are doing better: HDV is up about 7%, SCHD is down only 4% DJD is about flat, SPYD is down only 1.5%
for this reason, Siegel recommended a mix of growth stocks and dividend stocks for a portfolio. growth stocks usually perform better in 'bull' markets (when the market is going up) and dividend stocks are superior in bear markets. you can see his advice in the book Stocks for the Long Run.
(b) there's also data showing dividend stocks tend to offer superior long-term performance. year to year? not always. but dividend stocks have offered superior performance over the majority of 20 year periods in the US market since 1928 and with lower volatility. https://www.heartlandadvisors.com/media/Insights/White-Papers/Dividends-A-Review-of-Historical-Returns.pdf
the higher-dividend stocks in theS&P 500 have also beaten the overall S&P 500 index over time, by over 1% year on average. https://www.wisdomtree.com/en-gb/-/media/us-media-files/documents/resource-library/whitepaper/the-dividends-of-a-dividend-approach.pdf
this sub will tell you to just buy a total market index, but they usually can't explain why or offer much in the way to data or justification. they also tend to hate dividend stocks, but again can't really articulate a sensible objection. the best they can come up with is 'dividends are a taxable event', which is fair to point out for a taxable brokerage. otherwise they just repeat the same gripes over and over again without any evidence.
These studies are retrospective. It doesnt really help to look backwards and say "the stocks that paid high dividends beat the SP500" -- you need to be able to predict and invest in the right stocks before the dividend is paid. I mean, it's akin to saying "the fastest growing companies last yesr beat the SP500" -- ok, great, but how can you know ahead of time exactly which companies those will be?
Now if you know of a high dividend ETF or some backtested strategy that has consistently beaten the total market, I'd be all ears!
I know you aren't talking specifically to me but just as part of the community I will say I don't dislike dividend stocks in a retirement account. I do dislike them in a taxable account just because they provide an unneeded tax drag on the investment as well as an increase to your AGI.
Also I think the asset class you are refering to is more typically called Value than Dividend. Yes a lot of companies that are in the Value class offer dividends but that isn't really what defines them right. Really you are talking just about large companies that have been around a while have a big market cap and don't reinvest all of their returns into themselves as growth because they just dont have that much to gain from growth anymore. Those companies do tend to be more stable yeah so overall they are going to dip less (and subsequently rise less).
The idea that avoiding volitility in a retirement account where you are regularly contributing and are still young though not sure if that is 100% the best strategy. Lets say you are in largely growth stocks and they dip 25% in value while the Value stocks only drop 5%. That is great for the Value stock holder if they are about to cash out...but if they are 30 years from retirement well, that 25% drop in share price represents additional shares that they can purchase before the inevitable rebound over that 30 years. Its not like that lower drop in the Value share price means that the Value shares will be 20% ahead from there on out, that isn't how it works.
I'm pro value funds in holdings and pro say even a 60-40 mix, but when you are in your 50s and a substantial market downturn could actually negatively affect your retirement. Then yeah it makes sense. But for a 20 year old putting their first $1k into a Roth IRA? Nah.
Werewolfdad t1_iyf6cdl wrote
What’s wrong with the three fund portfolio? Dividends aren’t anything special