Dividends ETFs strategy validation

Investing / Portfolios
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Current situation
Age: Mid-40s with at least a 15-year investment horizon (starting late, unfortunately)

Goal: Generate passive income to enable early retirement

Growth Portfolio (~$215k):

VOO (51%), VXUS (21%), GOOG (8%), BIV (5%), NVDA (4%), PYPL (5%), IBIT (2%)

Dividend Portfolio (~$68k):

VIG (54%), VYM (18%), KO (15%), SPYI (8%), SCHD (3%)

Strategy: Currently planning to maintain a 70% growth / 30% dividend split for the next 5 years, then gradually transition to 30% growth / 70% dividend by year 15. The idea is to build a passive income base through compounding dividends.

However, after researching, I’m questioning whether this makes sense. Since I don’t need current income, investing entirely in growth might yield better returns—dividends are taxed as income (even though I can reclaim the 15% withholding tax via DA-1 form for US-domiciled funds), and dividend stocks tend to underperform growth stocks.

Is my dividend compounding strategy inefficient? Would I be better off going all-in on growth, then in 15 years selling part of it (no capital gains tax) to invest heavily in dividend stocks at that point? If so, I’d liquidate the dividend portfolio entirely and possibly add AVUV (small-cap US) to the mix.

Thanks for all suggestions and advices!

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My comments may seem contradictory, but it is just a reflection of complexity of financial markets.

Your portfolio size is significant, nothing to be ashamed of. In your stage of life, the efficiency of portfolio management is probably as important as new contributions.

Don’t confuse earnings and dividends. Big tech is highly profitable, they just reinvest their profits instead of distributing it.

This is correct. A dividends focused strategy during the accumulation stage is hardly rational in Switzerland.

This is your recency bias talking.

Yes, but it doesn’t make it wrong. Don’t let the tax tail wag the investment dog. The investment strategy comes before tax optimization.

That will bring you to something closer to the total market, with more fees and complexity.

My advice is to always go for the total global market, especially if you are not sure what you are doing.

P.S. you didn’t mention anything about your other investments - 2nd and 3rd pillar. While unrelated to your original question, it is an important part of your overall financial situation.

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Unless you add couple of millions during the next 5 years - not in Switzerland.

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Btw worth noting, this is a fairly concentrated portfolio (esp since nvda is already 8% of VOO, that by itself already makes many people uncomfortable).

Make sure you’re not chasing recent returns, being market neutral is often a better start.

And the use of USD bonds is surprising for a swiss investor (volatile/not tax efficient). (And 5% allocation probably won’t ever affect the outcome, does it even matter in backtesting?)

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Thanks for the hints. I’m still learning a lot about investments, especially after liquidating all my expensive :frowning: Postfinance funds and starting my journey with Interactive Brokers.

My core portfolio aims for capital gains, and for the next 10 years I’m open to taking higher risks. After that, I’d like to reduce volatility and adopt a more defensive approach to preserve capital.
I prefer VOO + VXUS over VT because it allows more customization of my US/ex-US allocation. Additionally, since VT is 60% US, it’s highly correlated with VOO and has similar volatility—so it doesn’t offer real advantages beyond simplicity.
Based on my research, I’m considering adding AVUV (for US small-cap exposure) and/or CHSPI (for home bias, up to 20%). I’m also thinking of closing my BIV position, as the more I learn about it, the less suitable it seems for my portfolio.

Unless you add couple of millions during the next 5 years - not in Switzerland.

Are you saying that generating meaningful passive income in Switzerland isn’t feasible without roughly 2M in a dividend portfolio? That would make sense given Switzerland’s high cost of living.

Your comments confirm that it would be more convenient for me to focus solely on growth for the coming years, and only shift toward dividends when I actually need the income. Therefore, I’ll close my dividend positions and keep the cash ready to deploy into growth ETFs during the next market dip.

I haven’t provided all the details from my side. I already have three Cornerbank 3a accounts (I open a new one each time I reach the 45-50K threshold). Starting next year, I plan to open a Finpension 3a investing account with 80-100% stocks.

For this account, would it be better to focus on the Swiss market for tax benefits (on dividends and 3a withdrawals), or should I focus on the US market (despite already holding VOO) and use CHSPI separately for home bias? The first option seems more appealing to me.

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Too many funds in my opinion. Edit: What I’d do is look at dividend growth for VIG and VYM and compare with that of SCHD. I didn’t do this myself but maybe should have. In my opinion when starting with limited capital and having a long runway then dividend growth is more important than dividend size, SCHD has a proven track record in that regard, I don’t particularly like Vanguard’s dividend funds. Still need to model it out, how much do you anticipate to have in dividends from these funds in ~15 years time. It won’t be much.

So, what is the purpose of the split? I’ve a similar size dividend allocation, gives about $2300/year which is pocket money anywhere other than sub-Saharan African countries. I only have it for psychological comfort, the rational decision is to go broad, growth stocks are already baked in the typical all-world funds anyway.

What I did was break up my VOO to 2/3 SCHD and 1/3 TQQQ (actively managed, whether it’ll work or not is unknown), they have essentially zero overlap. Edit: that’s my US tilt, 60% of the portfolio is in VWRL.

Even in a country like Greece one needs at least ~500k in JEPQ to live off it decently but not extravagantly, so Switzerland needing >=2mn sounds about right.

Whoah cowboy! One forum opinion driving a ~300k capital move decision? I think you need to do some more thinking and planning!

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Yes - if you indeed talk about early retirement. My situation is similar to yours in many aspects. I consider retirement at 60 to be a pretty regular one. Early retirement for me would be one at, ahem, 40. :roll_eyes:

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Yes, indeed. I initially built my portfolio based on a colleague’s suggestions, but his situation differs from mine. Now, after some learning, I’m adjusting my positions to align with my own needs and goals.
While I’m not convinced about NVDA for the long run (I bought it purely for speculation), I’m willing to keep GOOG for a few more years—though I probably won’t invest further in it. As for BIV, I’ll liquidate it entirely.

On that note, which products would be suitable for a Swiss investor looking to add some volatility cushion? Would it be more convenient to make voluntary contributions to the 2nd pillar instead of bonds? The return there is only 1%, but it would be tax-deductible.

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Thanks Mirager I really appreciate your your answer and contributions to the blog. I’m only considering adjusting the dividend portion of my portfolio (~60K, not the entire portfolio) :cowboy_hat_face: I’ve already gathered some ideas from reading the Mustachian Post and other finance blogs, and I was looking for opinions from people who may have been in a similar situation to confirm or challenge those ideas.

Regarding my passive income goal—I should have been clearer earlier—I’m aiming for supplemental income, not a full monthly salary replacement.

My question is: would it be more effective to let a dividend portfolio grow over time (probably keeping only VIG and possibly SCHD) and benefit from compounding despite dividend taxation, or would it be better to invest a lump sum only when I actually need the dividend income?

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Why VWRL and not VT (probably due to the broker user)?
With the domicile in Irland you lose 15% on LTW-1 and cannot get it back

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I’m not any sort of expert, we have many technical experts here. My gut feel reasoning to do what I did was a) psychological benefits, b) stress around selling.

The issue is that even a carefully picked dividend portfolio CAN AND WILL lose value on paper (@Your_Full_Name has some nice graphs showing his own dividend portfolio losing a lot of value BUT dividends remaining steady and increasing at the same period edit: my point/hypothesis here being that if one can live off dividends they don’t need to worry too much about their personal NAV, and can weather the storm, I think it’s a great place to be).

The other issue is that when growth…grows…it blows dividends out the water for total return, look at QQQ vs SCHD: https://testfol.io/?s=43HbyxqttqM

Edit: Coming back to your question about compounding dividends vs selling and converting, the one argument against is that you don’t know what the market will be like at the time you want to sell, the argument for is in the backtest I linked above :wink: even at its lowest point in 2022 QQQ would have given you more money than SCHD. Max drawdown is basically the same in % terms but in different time points. Both ate covid-19, but SCHD didn’t seem to mind the invasion of Ukraine. It’s a mind fornication labyrinth! Edit: I think you need to put all these scenario considerations down on paper and try to think through what’s your goal, what possible ways are there to get you there, what are the trade-offs for each path, how confident you feel you will be able to be on each path (and while at it, kick it - your expected testicular fortitude - down a notch or three, edit: because as Mike Tyson said “Everybody has a plan until they get punched in the face”!) to stick with it!

No, I can get VT with my broker, just prefer the European domicile.

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One general comment on tax efficiency of dividends in retirement:

You will likely get back a lot less with DA-1 during retirement, as your income is likely to be low enough to have a lot lower average tax rate than 15% (this is important for the calculation of DA-1 the tax office does). And if you don’t pay as much tax, there is no tax credit to be had, so you lose out on extra DA-1 with high US fund dividends.

If more dividend focus in retirement Switzerland based Swiss equity funds are most tax efficient, as you will have no withholding tax (you always get it back as a Swiss resident), focus for ex-US equity on Ireland domiciled funds, and for US stocks US domiciled is still most efficient.

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DA-1 Refund calculation
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11 posts were merged into an existing topic: DA-1 Refund calculation

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Some people (including me) plan to stay 100% in growth equities (e.g. VT or VOO) until death. You don’t need dividends, you can just sell what you need every month/year.

It all depends on your personal tolerance for risk and volatility.

This paper apparently (re-)triggered this trend. Not everyone agrees of course.

not in accumulating funds though, right? (less common in the US)

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In Switzerland they are.

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true, forget what I said

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Thanks for sharing.

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FWIW I’m on team Cliff Asness, as nobody here would have guessed. :wink:

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Maybe you meant Pillar 3a, but if you already manage your own IBKR account, I don’t understand why you would want to pay the finpension invest managment fee.

(Edit: you said “3a investing account”, and i only read “investing” account, which is the new offer from finpension for normal investments).

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Some people (including me) plan to stay 100% in growth equities (e.g. VT or VOO) until death. You don’t need dividends, you can just sell what you need every month/year.

I follow the same principle of not touching the principal. Because of that, my plan in retirement is to sell only the exact amount of my growth capital when truly necessary. I see this as an additional layer of “insurance” in case I need extra liquidity later in life (e.g., medical care).

Thanks to all your valuable feedback, I now need to decide whether it makes sense to let VIG compound alongside VOO, or whether I should simply invest in growth ETFs for the next 10 years and switch into a high-yield dividend ETF only when I actually need the income. Here is my current reasoning:

Although I don’t need any income today, it’s likely that in 10 years I will need a modest additional cash flow for smaller recurring expenses. Ideally, I would prefer not to touch my growth portfolio when that time comes.

  • VIG yield: ~1.64% → tax drag: ~0.246% p.a. (1.64% Ă— 15%)

  • VOO yield: ~1.1% → tax drag: ~0.165% p.a.

According to Vanquard, generating $1,000 per month in dividends would require about $700k invested in VIG.
Holding VIG could therefore be part of a hybrid strategy that reduces the risk of having to sell VOO during a bear market if I need liquidity. VIG’s current yield is relatively low (which is fine for my situation), but its price has historically grown over time — for example, $10k invested five years ago would be worth roughly $16k today. Starting now would allow me to benefit from compounding instead of investing a lump sum in 10 years. Still not sure if this is better than a lump sum in high dividends when needed and benefit from growth ETFs gain.

There isn’t an easy, one-size-fits-all answer here, as the decision involves multiple variables and tax considerations. But I really appreciate any feedback about this possibilities.