Some passive investors have done extraordinarily well by sticking with index funds and not worrying about the individual names that one can pick and choose from. Indeed, portfolio construction isn’t for everybody, especially for those who are retiring and seeking to live off their investments.
And while it can be as simple as buying and holding an index ETF that mirrors the S&P 500 (or the Nasdaq 100 for younger investors seeking a bit more of a growth jolt), I do think there’s also a case for picking individual dividend stocks and even mixing them with income ETFs or, yes, even the incredibly popular Vanguard Total Stock Market Index Fund ETF (NYSEARCA:VTI), which is even more diversified than the S&P 500, with exposure to America’s lesser-known mid-cap names. For a retiree, it’s just nice to have a steady cash flow stream trickling real money into your account without requiring you to sell anything.
VTI and chill is a sure way to minimize costs and maximize time saved
Indeed, index investing has boomed in popularity over the past decade, and it’s not about to hit a roadblock. At the end of the day, there will always be someone out there who prioritizes minimizing fees, simplicity, and, perhaps most importantly, saving themselves time. Indeed, it does take a lot of time and effort to conduct a valuation of an individual business or manage one’s portfolio every quarter, year, or whenever one desires.
Perhaps the biggest upside to sticking with the “buy the VTI and chill” method is that it takes emotions right out of the equation, or the desire to maximize one’s yield (chasing yield is a risky move). Every paycheck, you buy more VTI, and it doesn’t matter what stocks have been doing of late.
While this means of investing is a fantastic fit for many, it might not be the best for the young investor who’s ready and willing to learn, with the ambition to do better than the averages. Now, beating the market is no easy feat. But some normal people (not hedge funds or billionaire investment legends) have pulled it off.
Still, if you just bought the Magnificent Seven stocks when Jim Cramer coined the term, you’d be sitting on a pretty lofty gain today that the S&P 500 or the broader VTI can’t stack up against. Though it’s hard to tell if the Magnificent Seven can keep leading the way, especially as the broad market becomes more top-heavy, I do think that sticking with a portfolio of high-quality growth businesses at reasonable multiples is a winning strategy.
In any case, dividend investors don’t have the same desire to beat the market on the total returns front. Rather, they want to keep their yield elevated, even if the cost is trailing VTI returns, perhaps by a landslide.
What about dividend investing?
Dividend investing, which prioritizes yield over capital gains or total returns, may receive a bad rap, especially compared to a more hands-off approach, such as investing in a “VTI and chill” method.
While there’s nothing wrong with going out of your way to score more yield, especially given the VTI only has a 1.1% yield, I do think that the higher up the yield ladder you go, the lower your growth and capital returns potential. Regarding dividend investing, I think too many income-hungry investors are guilty of neglecting upside as they reach for that higher-yielding dividend stock or ETF. Doing so could cause one’s total returns to be sub-par versus indexing.
When you consider that capital gains are taxed at a lower rate, I think it’s clear that something like the “4% rule,” which entails a 4% annual drawdown from a portfolio’s invested principal, is more tax-efficient than pursuing higher-yielders. Of course, dividend investing has its own share of perks. Most notably, certainty regarding the cash that’s coming in every month or quarter. However, for that certainty, one stands to give up a lot in the way of long-term capital appreciation and tax efficiency. In my view, the trade-off just isn’t worth it.
Personally, I think income investors can get the best of both worlds by owning the VTI for the most part while diversifying into individual dividend stocks and ETFs to boost the portfolio’s average yield. That way, one will get a predictable cash flow stream alongside decent appreciation while keeping fees relatively minimal. With a yield just a bit higher than 1.1%, perhaps one will need to draw down a bit less than 4% to live off one’s investment income.
Top Gaining Stocks
Top Losing Stocks