And the power of the $VWRL (-0.03%)
Shit ey, so now the time has come. The crypto-donkey makes a post about dividends. A clear sign that I'm getting old.
Again and again I read about young people on getquin who want to put a high dividend ETF like the $ISPA (-0.33%) into their portfolio. I certainly understand the desire for dividend payouts in old age:
- Not everyone is comfortable with selling parts of their portfolio even when prices are falling
- When switching from an accumulating ETF to 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 advance lump sum becomes due and the tax advantage of an accumulating ETF over a distributing ETF dwindles - even if it is not completely equalized [1].
But please, don't put an ETF with a high dividend yield in your portfolio at a young age. Why not? I will illustrate this in this article with a comparison between $ISPA (-0.33%) and $VWRL (-0.03%) (and then I'll finally talk about @Vanguard a sweater 😁)
Price development
As at 14.01.2013, the share price was $ISPA (-0.33%) 21.23 euros. That of the $VWRL (-0.03%) was 43.50 euros. On 16.01.2023, the price of the $ISPA (-0.33%) was 28.73 euros and the $VWRL (-0.03%) at 96.29 euros. A one-off investment of 10,000 euros would have given you a book value of $ISPA (-0.33%) would have given you a book value of 13,532.74 euros for the $VWRL (-0.03%) of 22,135.63 euros. A considerable difference after just 10 years.
Dividend is not reinvested
But you are not concerned with the book value, but with the dividend. In 2022, the $ISPA (-0.33%) paid out 4.55%. So you would have received 615.74 euros. The dividend yield of the $VWRL (-0.03%) was only 1.71% in 2022 and therefore less than 40% of the dividend yield of the $ISPA (-0.33%) but due to the high price growth you would have received EUR 378.52 and thus already more than 60% of the absolute distributions of the $ISPA (-0.33%) received.
If you use the price growth of these 10 years as a benchmark for the following 20 years, e.g. until retirement, the value of the investment in the $VWRL (-0.03%) of 109,358.79 euros after 30 years. On average, the $VWRL (-0.03%) dividend yield of 2.21%, which corresponds to an absolute payout of EUR 2,416.83 after 30 years. The $ISPA (-0.33%) results in a book value of only 24,989.64 euros. The average distribution of the $ISPA (-0.33%) of 4.36% results in an absolute distribution of 1,089.55 euros. Not only does the $VWRL (-0.03%) you have a much larger sum in your custody account, the annual distributions are also higher - even though the $ISPA (-0.33%) is actually the ETF with the highest dividends.
Of course, the effect increases even further over time. If the sum is invested once by a 20-year-old, the ETF will distribute $ISPA (-0.33%) distributes 2,006.41 euros on his 70th birthday. The $VWRL (-0.03%) whose book value is now almost 12 times as valuable as that of the $ISPA (-0.33%) pays out a full 11,907.35 euros a year - 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 (-0.33%) the nose in front? We assume that the distributions are reinvested annually and taxed at a flat rate of 25%.
After 30 years, the $ISPA (-0.33%) 63,763.89 euros and thus pays out 2,780.11 euros. The $VWRL (-0.03%) is 172,482.77 euros and pays out 3,811.87 euros. So even if the dividend is fully reinvested during the accumulation phase, the investor is left $VWRL (-0.03%) investor is left with almost three times as many assets after 30 years and an annual payout that is over 1,000 euros higher.
But you have now omitted the partial exemption!
Yes, that's right. Thank you @RisingAktie for pointing this out. Assuming that 30% of the distributions are tax-free and the 25% tax only applies to the remaining 70%, this still paints a sad picture for the $ISPA (-0.33%) . After 30 years, the book value of the $ISPA (-0.33%) 69,914.34 euros (distribution: 3,048.27 euros), the book value of the investment is $VWRL (-0.03%) 180,455.70 euros (distribution: 3,988.07 euros).
Even if there were no tax on dividends at all, the book value after 30 years would be $VWRL (-0.03%) would be 200,469.07 euros after 30 years (distribution: 4,430.37 euros) and the $ISPA (-0.33%) 86,577.51 euros (distribution: 3,774.78 euros).
On getquin, however, the $VHYL (-0.55%)
is much more popular!
Yes, that's right. But I finally want my Vanguard sweater. I'll have to be careful what I write. But well, because it's you: the $VHYL (-0.55%) performs just as badly as the $VWRL (-0.03%) as bad as the $ISPA (-0.33%) the Vanguard. But don't tell anyone.
Conclusion
Of course, nobody knows what the future will bring. Future dividends and share price developments may differ greatly from the assumptions made here and therefore lead to a completely different result. By selecting a more suitable dividend ETF or very good stock picking of shares that pay out high dividends and grow at the same time, the price performance and distribution of the $VWRL (-0.03%) could be beaten.
Nevertheless, high dividend payments often go hand in hand with low share price growth, which is why the comparison made here can certainly serve as a guide for your personal investment strategy. If the desire is for high dividends in 30 or more years, I would therefore personally prefer a distributing ETF with high price and dividend growth. This is also the reason why my high dividend ETF is no longer in my portfolio, and instead the $VWRL (-0.03%) forms my core for growth and high dividends in old age.
tl;dr
"Those who sacrifice share 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 a monthly cash flow - a close look at dividends" by @Fabzy
https://app.getquin.com/activity/ztGnWscOHe
Prices + dividend development of Extra ETF
#learn
#etf
#dividends
#dividend
#esel
