Why you shouldn't bet on high dividends at a young age
And the power of the $VWRL (+0.2%)
Shit ey, so here it is. The crypto donkey makes a post about dividends. A clear sign that I'm getting old.
Time and time again I read about young people on getquin who want to put a high dividend ETF like the $ISPA (-0.14%) want to add to their portfolio. I certainly understand the desire for dividend payouts in old age:
- Not everyone is comfortable with selling parts of the portfolio even when prices are falling
- When switching an accumulating ETF into a distributing ETF after 30 years and a fat profit, a lot of taxes will be due (at least if the tax system remains similar to today)
- Due to rising interest rates, the upfront lump sum becomes due and the tax advantage of an accumulating ETF over a distributing ETF dwindles - even if it is not completely leveled out [1].
But please, don't put a high dividend yield ETF in your portfolio at a young age. Why not? I'll illustrate that in this post with a comparison between $ISPA (-0.14%) and $VWRL (+0.2%) (and after that I want to finally get away from @Vanguard a sweater 😁)
Price development
As of 01/14/2013, the share price stood at $ISPA (-0.14%) was 21.23 euros. The des $VWRL (+0.2%) was 43.50 euros. On Jan. 16, 2023, the share price of the $ISPA (-0.14%) was 28.73 euros and that of $VWRL (+0.2%) at 96.29 euros. A one-time investment of 10,000 euros would have given you a book value of $ISPA (-0.14%) would have given you a book value of 13,532.74 euros, for the $VWRL (+0.2%) 22,135.63 euros. A considerable difference after just 10 years.
Dividend is not reinvested
But you're not concerned with the book value, but with the dividend. In 2022 the $ISPA (-0.14%) paid out 4.55%. You would have received 615.74 euros. The dividend yield of the $VWRL (+0.2%) was only 1.71% in 2022 and thus less than 40% of the distribution yield of the $ISPA (-0.14%) but due to the high share price increase, you would have received 378.52 euros and thus already more than 60% of the absolute distributions of the $ISPA (-0.14%) received.
If you use the price growth of these 10 years as a benchmark for the following 20 years, e.g. until you retire, the value of the investment in the $VWRL (+0.2%) of 109,358.79 euros after 30 years. On average, the $VWRL (+0.2%) dividend yield of 2.21%, which corresponds to an absolute payout of 2,416.83 euros after 30 years. At $ISPA (-0.14%) the book value is only 24,989.64 euros. Due to the average payout of the $ISPA (-0.14%) of 4.36% results in an absolute payout of 1,089.55 euros. Not only that with the $VWRL (+0.2%) you have a much larger sum in the depot, also the annual distributions are higher - and that, although the $ISPA (-0.14%) is actually the ETF with the high dividends.
Of course, the effect increases over time. If the sum is invested once by a 20-year old, the $ISPA (-0.14%) will pay out 2,006.41 euros on his 70th birthday. The $VWRL (+0.2%) whose book value is now almost 12 times as valuable as that of the $ISPA (-0.14%) will receive an annual payout of 11,907.35 euros - more per year than the sum invested 50 years ago.
Reinvesting the dividend
Of course, this is only half the truth. Realistically, dividends are reinvested in the savings phase. Does the $ISPA (-0.14%) come out on top? We assume that the dividends are reinvested annually and taxed at a flat rate of 25%.
After 30 years, the $ISPA (-0.14%) then amounts to 63,763.89 euros and distributes 2,780.11 euros. The $VWRL (+0.2%) is 172,482.77 euros and distributes 3,811.87 euros. So even if the dividend is completely reinvested during the accumulation phase, the $VWRL (+0.2%) After 30 years, the investor is left with almost 3 times the assets and an annual payout that is more than 1,000 euros higher.
However, you have now suppressed the partial exemption!
Yes, that's right. Thanks @RisingAktie for the hint. Assuming 30% of the distributions are tax exempt and the 25% tax only applies to the remaining 70%, it still paints a sad picture for the $ISPA (-0.14%) . After 30 years the book value of the $ISPA (-0.14%) investment is 69,914.34 Euro (distribution: 3,048.27 Euro), the book value of the investment is $VWRL (+0.2%) investment at 180,455.70 euros (distribution: 3,988.07 euros).
Even if there were no tax on dividends, the book value of the investment would be $VWRL (+0.2%) after 30 years would be 200,469.07 euros (distribution: 4,430.37 euros) and the $ISPA (-0.14%) 86,577.51 euros (distribution: 3,774.78 euros).
On getquin, however, the $VHYL (+0.09%)
is clearly more popular!
Yes, right. But I finally want my Vanguard sweater. I have to be careful what I write. But good, because you are: The $VHYL (+0.09%) performs as badly as the $VWRL (+0.2%) as bad as the $ISPA (-0.14%) the Vanguard. But don't tell anyone.
Conclusion
Of course, nobody knows what the future will bring. Future dividend payouts and share price performance may be very different from the assumptions made here, leading to a completely different outcome. By selecting a more suitable dividend ETF or very good stock picking of stocks that pay high dividends and grow decently at the same time, the price performance and payout of the $VWRL (+0.2%) be beaten.
Nevertheless, high dividend payments are often accompanied by low price growth, which is why the comparison made here can certainly serve as a guide for personal investment strategy. If there is a desire for high dividends in 30 or more years, I personally would therefore rather go for a distributing ETF with high price and dividend growth. This is also why my high dividend ETF is no longer in my portfolio, and instead the $VWRL (+0.2%) forms my core for growth and high dividends in retirement.
tl;dr
"Those who sacrifice price growth to gain dividends will end up losing both" - Donkey, 2023
You're welcome.
Your DividendDonkey 🤮
Sources
[1] "Why you don't need dividends for monthly cash flow - Dividends put to the test" by. @Fabzy
https://app.getquin.com/activity/ztGnWscOHe
Extra ETF Quotes + Dividend Trends
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