S&P Dividend ETF's

Discussion of the Stock portion of the Permanent Portfolio

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Boeing737
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S&P Dividend ETF's

Post by Boeing737 » Wed Jul 28, 2010 7:57 pm

Is anyone using S&P dividend ETF's like SPDR SDY or iShares DVY to recession-proof your stock Portfolio?
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craigr
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Re: S&P Dividend ETF's

Post by craigr » Wed Jul 28, 2010 8:03 pm

I wouldn't buy these funds especially if you are taxable investor.

Dividends from a fund are much different than dividends from a stock. The fund pays a dividend because they are required to by law or they have to pay taxes on that money themselves. However, the price of the fund falls by an equal amount of the distribution so there is no net gain for investors. If you are taxable then you ended up paying taxes on the distribution even though you derive no net benefit from it.

Lastly, there is no guarantee that a high dividend stock will be recession proof. They could in fact be burning capital to keep the dividend and this can lead to its own problems.

For these and other reasons I recommend just sticking to the basic broad based total stock market fund.
Last edited by craigr on Wed Jul 28, 2010 8:20 pm, edited 1 time in total.
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KevinW
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Re: S&P Dividend ETF's

Post by KevinW » Thu Jul 29, 2010 1:52 am

I agree with craigr's points, and would add that the Permanent Portfolio already has strong recession-proofing from the large cash allocation.  Stocks are for prosperity and I think it's important to maintain the direct connection between the four economic conditions and the four assets.

If you want a more recession-oriented portfolio then I would hold a pure 4x25 portfolio, plus a variable portfolio full of recession-linked investments.  Harry Browne's analysis was that cash was the best asset for recessions, although you're not alone in feeling that dividend stocks are a recession play.

As I said, I agree that a total market fund will have the same risk/reward profile as dividend stocks, and the total market fund will be more tax efficient, simpler, and have lower expenses.  However I wouldn't go so far as to say that dividends have no benefit.  IMO a dividend can be viewed as a message from management about how much cash can be sustainably siphoned out of the company.  So a dividend fund has a built-in estimate of a safe withdrawal rate, and that estimate is diversified across the management of all the stocks in the fund.  This information could be valuable to an investor that puts a premium on estimating a bulletproof withdrawal rate.  However this is a very specific set of circumstances and I think a total market fund is a superior general-purpose stock investment.
Boeing737
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Re: S&P Dividend ETF's

Post by Boeing737 » Mon Aug 02, 2010 6:49 pm

Thanks for your comments. I am going with VTI since it covers over 3,000 stocks vs only 50 for SDY.
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