I’m looking to understand how real dividends (ideally CHF denominated) of VT or similar funds have faired over the long run. VT only started around 2008, I’d be looking for something going back much longer.
Basically I’m hoping to eventually become FI to the point that I can live just off the dividends of my VT portfolio and am trying to understand whether my intuition is correct that dividends of globally diversified ETFs are:
much less volitile than the price of the equity itself
basically consistently go up in real terms over time
don’t substantially crash when there is a stock market crash
(Maybe 1 = 2 + 3 )
I was looking at S&P 500 Dividend Growth - Multpl which supports this
(eg for reduced volatility, note that in the GFC when S&P dropped ~50% the dividends only dropped ~25%)
However the above does not take into account inflation so it’s kind of useless.
Curious if anyone else has already done this analysis! When it gets to dividend season at the end of the quarter I always get excited
This certainly rings true to me but I haven’t done the homework for VT or similar funds/indexes over the long run. Perhaps you’ll find data at Kenneth French’s website: Kenneth R. French - Home Page (dartmouth.edu)
Going back to 2008 this is what the VT’s dividends looked like, according to Divvidiary:
(You can probably ignore 2008 since VT’s inception was only in the middle of 2008))
The FTSE All-World index – used by VT before December 18, 2011 – only goes back one or two more years, I’m afraid. But the (dividend) returns look similar:
Mostly up and to the right, but some sideways years, e.g. after 1999. The first time the dividend exceeded the 1999 one was in 2004.
After the great financial crisis in 2008/2009 it took until 2014 until the dividend exceeded the 2008 one.
After 2019 the dividends dropped only in 2020 and recovered (barely) in 2021.
Goofy’s plug:
Of course you could optimize this further if you picked a custom portfolio of (mostly) companies with a history of paying and growing dividends (like mine aka the Goofy Index™) instead of “the market”. Its dividend track record:
Admittedly, it has one* hickup as well, but overall seems smoother? The biggest drawdown (in dividends) was from 2007 to 2008: -15%. It took until 2011 for the dividend returns to exceed the 2008 ones.
Also note: no dividend drawdowns after the tech bubble blew up and after COVID-19.
* I don’t consider the drop from 2012 to 2013 as a drawdown – it looks to me more like 2012 was an outlier peak.
Thanks a lot for the excellent and very helpful reply! That all makes sense to me. One nit which i couldn’t resist though…
I’m not sure how reliable this chart is in terms of future extrapolation, because you’ve selected your index precisely to consist of companies that have increasing dividends in recent history.
If we’re talking dividend growth focus my examples would be FUSD (US Quality Income, which I own), FGQD (Global Quality Income, which I don’t).
There are also TDIV (Global developed market dividend leaders), VEUR which has a good dividend, VHYL which just filters for yield, some German ones I can’t recall the ticker, none of which I own. I feel we’re lacking a global UCITS ETF focused solely on dividend growth investing, and what we have approximating it are quite expensive for my taste and not really on point (other than FUSD and FGQD), but I’m keen to hear of one if someone knows.
In my reading, and will let Goofy tell us his take, extremely reliable. Companies cutting dividends are punished very severely by the market. Of course diversification is necessary, as cuts can and do happen, and there are business risks when decisions around paying of dividends start impacting business decisions - I have a couple of anecdotes from people who worked in two famous Dividend Aristocrats and they said the firms do everything to protect the holy dividends, at the expense of good business decisions, overworked staff, lack of resources…
My only take on this very useful thread is that, as I am sure you’ve done the arithmetic and know, you’d need a BIG portfolio to live off VT dividends.
I think past information can be fetched but if you are interested in future, the story can be more complicated
If larger share of S&P 500 is dominated by non-dividend (low dividend ) paying companies, then if you choose S&P 500 ETF , you would eventually have lower dividends as a percentage of your portfolio value.
This is not because dividend paying companies reduced dividends but because your allocation to dividend paying companies reduced due to higher allocation for low dividend companies
If you look at top 10 companies in S&P 500, the dividend yield is quite low. But they account for big share of market cap.
If you really like dividends and you would prefer a certain % of portfolio value in dividends, then you need to think of a different portfolio which focus specifically on dividend paying stocks. Of course then you would be making a bet on those companies specifically but I guess you already know that. You should be willing to live with the eventual outcome (good or bad) in terms of total returns
All of them cutting dividends at the same time, though? That’d mean something is seriously wrong in a hell of a lot of sectors (pharma, insurance, banking, utilities, commodities, materials, energy), that’s why you have diversification and not just buy one stock. When I was educated on the benefits of diversification I was told “Look, to lose your money (in VWRL or equivalent) you’d need about 100-200 of the world’s biggest companies to go bust at the same time, ain’t gonna happen”, and I was convinced.
Sure, we can go in circles of “what if” all day. I get you don’t like dividends, or think it’s a poor/inefficient/suboptimal/silly way to invest. It’s acceptable and reasonably respectable, but this is a thread about dividends. There are those of us who do like them for any sort of rational and irrational reasons, no need to cross paths regarding dividends if we don’t have common ground.
Fair point: past performance is no guarantee of future results.
As for picking my stocks selecting my index* I try to balance between those with multiple decades of raising dividends and those with a shorter track record but perhaps steeper increases:
my stock picked companies have raised their dividend for an average 18 years.
of the ones that haven’t raised
most have kept their dividend steady for several years
about two have cut their dividend this year
another one or two have just initiated a dividend (they were assigned to me through spin-offs)
another one or two don’t pay a dividend yet (also spin-offs)
I believe @Quack wasn’t interested in a total return comparison of ETF xyz (in particular VT) vs the S&P 500 – I think we all know VOO will beat VT and probably most income oriented ETFs on a total return basis.
Instead, I believe, @Quack is interested in whether ETFs (like VT) pay out dividends with a lower variance than said ETF’s market price – ideally with the dividends always growing, see his list of 1.,2., 3. – such that one can live off it reliably even in downturn years when your portfolio valuation might be halved, but your dividends maybe only take a haircut of 10% or 20% that you’re able to stomach – and you don’t have to sell your ETF (like VT) just at the time the market tanked in order to keep up with your expenses (which haven’t tanked).
I believe @Dr.PI 's recommendation was not to focus on any old Dividend-Focused ETFs but to try to select the ones that satify @Quack 's goal of steady dividends, economic or market crisis or not, i.e. companies with a quality in their ability to pay dividends.
As far as I can tell none of DVY, SDY, VYM nor NOBL fit this bill, but YMMV, and to each their own, of course.
Yes, this was exactly my intention with the original question.
While I agree with others in principle that there is theoretically no difference between dividends and capital appreciation (and therefore it makes sense only to look at total return), from a psychological perspective I find it useful to consider the behaviour of dividends.
Personally I hope to never have to sell my ETFs other than to rebalance, as I am still early in my career, enjoy work, earn well, and am not motivated to have an expensive lifestyle. Thus I will hopefully wake up one day and realise that my dividend income pays covers my basic expenses. If I know that the dividends are likely to be fairly stable this will be psychologically very freeing for me.
Of course on the other side, I know that this would be functionally equivalent to saying that a withdrawal rate of 2% (or whatever the current dividend yield of VT is) is safe with ~100% probability, due to the equivalence of dividends and capital appreciation.
But psychologically for me, due to my irrational monkey brain (I’m not actually a duck btw ) those two statements are not the same, and regardless of how much I think about safe withdrawal rates, I can’t imagine feeling completely secure if I’m actively selling my assets every month/quarter/year.
(Anyway, I don’t want to turn this into a total-return vs dividend discussion, just wanted to give context on why I was asking)
Btw I was thinking more about this. The problem with the graph you showed was that those companies were specifically chosen on the basis that the dividends were steady/increasing, so it’s not surprising that when you look into the past that’s indeed what you see given that you started choosing these companies quite recently.
A way to test this without suffering from that issue would be:
For every year Y from some time in the past to now:
Apply your method based on data up to year Y to select a basket of stocks
Look at the performance of your selection from year Y to today.
and then look at the distribution of behaviours over all of the values of Y.
(I think I’m just describing backtesting? )
Of course your method is quite labour intensive so I don’t think that’s actually feasible.
That’s the dividend yield (dividends divided by the price). In the long run I guess you expect it roughly to be flat, and to go up or down as valuations change (higher P/E ratio ~> lower dividend yield)
Your thinking is right. But I would suggest to define if you are trying to have consistency in dividends (USD) / share
Or
You are seeking consistency is dividend yield (which is annual dividend / share price)
The answer to both questions might not be the same.
Since VT theoretically have all the stocks in the world, i would assume the weights of companies within VT would automatically adjust based on market cap but the number of shares of each company within VT should remain the same.
For example -: let’s say there are only 10 companies in the world and they were all equal market cap in beginning of time. VT would buy one share of each. Now even though first company grows 10x , each share of VT would still own one share each of all the companies. It’s just that exposure to first company would be higher versus the beginning.
This would mean the dividend per share could increase or remain the same if underlying companies continue to exist and keep growing their dividends.
But dividend yield might not follow the same rate of increase because growth of dividends might not follow the growth of market cap.
The graph indeed just shows historic returns of the current composition of my Goofy Index™.
I could show you a graph of the historic returns for the then actual composition of the portfolio for each month since June 2019,* but since I’ve inserted money into the portfolio (and recently have started withdrawing as well), this still wouldn’t give you the picture you are looking for, I think, since the dividends grew over proportion when new money was added (and grew less when I started taking money out).
You would need to come up with a “Time Weighted Dividend Return” calculation to get a picture of dividend returns in some normalized way … I’m not aware of such a metric.
The closest thing indeed is probably to calculate the Time Weighted Return (TWR) as suggested by @purplebike
It doesn’t quite deliver what you are looking for as it’s more of a total return metric but taking into account inflows and outflows of the portfolio.
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)
) those two statements are not the same, and regardless of how much I think about safe withdrawal rates, I can’t imagine feeling completely secure if I’m actively selling my assets every month/quarter/year.
