Gyroscopic Investing

I really like the idea of compounding dividends from stocks. So I would like to concentrate on stocks which produce good dividends. I don't think such a fund would deviate far from the mean of a total stock index, but could provide more return. Would this be a good idea? 

Is this in a tax deferred account? If you have to pay taxes, I'm almost positive this strategy will lag a total market index in the long run.

An all high dividend stock index wouldn't be volatile enough for the stock portion.

My plans are to put it in a roth so dividends can compound without taxes.
And, yes, something like VYM has about the same volitility as the S&P500.
I  understand that the idea is to have aggressive stocks, but I am not sure that is viable anymore.

crisafugate wrote: My plans are to put it in a roth so dividends can compound without taxes.
And, yes, something like VYM has about the same volitility as the S&P500.
I  understand that the idea is to have aggressive stocks, but I am not sure that is viable anymore.

Dividend paying stocks can be a great stand alone strategy, but in the event that we were to see another secular bull market for stocks, you don't want to own a bunch of utility, drug, and tobacco stocks as part of a PP strategy.

Favoring one part of the equity market, however well-intentioned it may be, still dilutes the safety of the PP and puts you back in a position of having to make correct predictions about what will happen in the future.

The common theme with all PP tinkering is that we will make a small tweak to the approach with the intention of making it safer, when the actual result is often just the opposite.

People want to swap gold for TIPS.

People want to buy shorter dated bonds like VUSTX.

People want to put their cash into municipal bonds, CDs and agency debt.

People want to buy emerging market, small cap, value, dividend, etc. stocks instead of just buying the whole market.

IMHO, none of this improves in any way on HB's basic PP recipe, though it does often unwittingly introduce additional levels of risk to the portfolio.

I say keep it simple.

Yeah, what M.T. said. It's not the worst strategy for a variable portfolio, but it's not part of the pp. Dividends were almost certainly better when Harry Browne developed the pp strategy (Clive probably has the answer), and even then he didn't bite.

dualstow wrote: Yeah, what M.T. said. It's not the worst strategy for a variable portfolio, but it's not part of the pp. Dividends were almost certainly better when Harry Browne developed the pp strategy (Clive probably has the answer), and even then he didn't bite.

Indeed.  Dividend yield is at historically low levels (e.g. under 2% for the S&P 500), but more interesting is that dividend payout ratio is also at historically low levels.  In other words, yield is not low because stocks are overpriced, yield is low because companies are paying out less of their earnings.  Since WWII the yield averaged about 4% until the early 1990's, and if the payout ratio now was the same as it was then, the yield would also average about 4% now.

However, consider that when HB developed the PP strategy he thought he wanted high-volatility stocks.  By definition that would be small caps or perhaps large caps that had been hit by something which sharply (but likely temporarily) reduced their market cap.  (E.g. JNJ recall issues, tobacco lawsuit, etc.)  In later editions when he decided to just go with a basic index fund he gave up volatility in exchange for predominately a large-cap stock play -- almost the exact opposite!  This is because most index funds with any significant chunk of the market are market cap weighted.

If you buy an S&P 500 index fund, you are putting nearly all of your investment into just the 100 largest companies on the exchange.  Almost 20% of your investment is in just the top 10 holdings, which are the 10 largest companies by market cap.  What about the next 20 holdings?  They are the next 20 stocks from the DJ 30 and will be another 25%+ of your investment.  You think it changes if you buy a whole market instead of S&P 500?  Not by much.  The top 10 are still 15% of your investment and the top 100 are still almost all of it meaning you have next to nothing in small caps.  (And worse, the funds tracking the "whole market" often do not hold the actual shares, but seek to approximate.  E.g. VTI "holds a broadly diversified collection of securities that, in the aggregate, approximates the full index in terms of key characteristics.")

Wasn't the most recent HB recommendation just to use an S&P 500 index fund?  So by using a whole market fund index instead you are giving a very slight tilt toward small caps.  Or if you want to buy the DJ 30 index instead of S&P 500 it is a slightly larger tilt away from small caps.

So IMHO if you want to slice small-cap index instead of whole-market index that is probably more like the original HB concept -- give away the stability of the large caps and get the volatility of small caps.

I really like dividend growth stocks (those that have a record of paying dividends and growing them consistently).  I have checked out a lot of dividend funds, and not yet found a good one.  Too expensive, too poor a return (dividend + capital gain) and so I pick dividend stocks myself.  Predominately large caps.  I supplement with a small cap index, getting more small cap exposure than I would in VTI and better dividends at the same time (better than 2x the yield).

But a high-yield dividend fund?  In addition to picking the temporarily impaired large caps they pick the ones which are borrowing to pay their dividend (e.g. pre-bankrupt G.M. and many banks ca. 2008) as long as their dividend yield is high enough.  Then if/when the dividend gets cut, the stock price tanks but typically the fund has to keep holding the stock until their underlying index is reconstituted (sometimes a year away).  Or if not tracking an index, the fund has to try and beat the market to capture a minimal loss in the shares and look for the next highest yield to invest in.  That's not for me.

crisafugate wrote: something like VYM

See the 2008 return of VYM?  Compare a 5yr chart with the S&P 500.  VYM is one of the funds that has to hold stocks that have a high odds of cutting their dividend, and hold them after they cut until the next time the index is reconstituted.  It's not a winning idea, IMHO.  Of course, maybe the future will be better. 

If you really like the dividend idea, look at the VYM top 10 holdings, or better the underlying index, check out the companies, and buy the ones that pass muster.  Skip the ones who don't make enough money to pay the dividend, or that do not have a good history of paying a growing dividend.  For more info look up dividend growth investing.

crisafugate wrote: I really like the idea of compounding dividends from stocks. So I would like to concentrate on stocks which produce good dividends. I don't think such a fund would deviate far from the mean of a total stock index, but could provide more return. Would this be a good idea? 

In the UK, we have an ETF which only contains the highest dividend payers in the FTSE, there must be something similar for the US.

Clive wrote: Perhaps look to buy enough shares in your electricity provider so that the yearly dividends cover your yearly electricity usage charges. Same for water, gas, telephone and insurance.

Same also for oil (petrol/gas), food, coupled with a chunk in pharmaceuticals.

While you're at it, buy enough government bonds to pay your income taxes.

Clive wrote: Perhaps look to buy enough shares in your electricity provider so that the yearly dividends cover your yearly electricity usage charges. Same for water, gas, telephone and insurance.

Same also for oil (petrol/gas), food, coupled with a chunk in pharmaceuticals.

That's my recipe to turn any dividend-paying company into a client-owned cooperative, at least on an individual basis.