3Semana·

Why dividend ETFs are often not the right choice... (with a recommendation for "newcomers" at the end)

Possibly a controversial topic ;)


In the last few days I've been writing more and more in the comments here that I don't think ETFs like Fidelity Global Quality Income are so great, at least for young people. So that I don't have to write the same thing over and over again, I'm going to write a post.


As many of the ETFs compared here have only been around for 5-7 years, I can unfortunately only make a comparison of performance over 5 years. That's quite short, I know. However, it is good in that we had two difficult years. Apart from the fact that, as a young person, I would only consciously choose a distributing ETF if I were planning my portfolio for retirement, for example, I have now also chosen the distributing variant of the standard ETFs here for better comparability.


My opinion is that anyone with a long investment horizon will get the best return and probably even the best payout if they choose a standard ETF.

The others are suitable as an add-on or main ETF as soon as you reach a certain age (and retirement is just around the corner) or you have a lot of capital and want to live off the dividends.


Now for an overview (source: Morningstar)


$HMWO (+0,14 %) MSCI World dist

Performance 5 years: 13.11% p.a.

Last 12-month distribution: 1.41% p.a.


Simulation, investment today 100,000 euros, 30 years with the performance assumed above (note: this is too high and is not intended to suggest that you could achieve this safely. The performance over a longer observation period is worse p.a.)


Result: approx. 4,000,000 euros

Distribution, assuming that it (the div yield) remains constant: EUR 56,400


$VWRL (+0,1 %)
FTSE All world dist

Performance 5 years: 11.63% p.a.

Last 12-month distribution: 1.28% p.a.


Simulation, investment today 100,000 euros, 30 years with performance assumed above

Result: approx. 2,700,000 euros

Distribution, assuming that it remains constant: 34,500 euros


Incidentally, this again shows my general problem with the AllWorld compared to the MSCI world... When does it ever perform better? How often have EM outperformed DM?

To colleagues with an investment horizon > 30 years => Do you really want to leave 1.3 million euros lying around?


$FGEQ (-0,05 %)
Fidelity Global Quality

Performance 5 years: 11.07% p.a.

Last 12-month distribution: 2.2% p.a.


Simulation, investment today 100,000 euros, 30 years with the performance assumed above

Result: approx. 2,300,000 euros

Distribution, assuming that it remains constant: 50,600 euros


Insight: I have considerably more capital with the MSCI World and potentially a higher dividend.


But: It is true that the 5-year dividend growth is higher with Fidelity than with the MSCI World dist, and not insignificantly so. It is therefore more likely that Fidelity will be able to keep its dividend payout constant than the MSCI World. However, the difference in capital of over 1.5 million euros is very significant.


However, it should be noted that this ETF effectively takes the MSCI World, then filters according to quality aspects (there is also the $IS3Q (+0,13 %) which also performs better) and then filters by distribution. The amount of the distribution is at most relevant for the weighting. Or how else can you explain the fact that NVIDIA, the dividend stock par excellence (irony), has a not-so-small position in the ETF? And please don't tell me about dividend growth: Yes, it's great for NVIDIA, but when will I receive a distribution that isn't 0.03%? In 80 years? What I'm trying to say is that the ETF doesn't really have a dividend approach. It has a nice payout ratio and nice dividend growth, but it doesn't generate this by buying stocks with a real dividend focus. You can find that good or bad.


$GGRP (+0,27 %) WisdomTree Dividend Growth:

Performance 5 years: 7.34% p.a.

Last 12-month distribution: 1.57% p.a. (reduced)


Simulation, investment today 100,000 euros, 30 years with the performance assumed above

Result: approx. 830,000 euros

Distribution, assuming that it remains constant: 13,000 euros


Why do I still think it's a good addition: it brings a few defensive companies into the portfolio or gives them a higher weighting. Depending on market expectations, this can therefore be a good addition.

In contrast to Fidelity, it also has a significantly different approach to the MSCI World, for example.


$VHYL (-0,48 %)
FTSE All world High Div Yield

Performance 5 years: 7.62% p.a.

Last 12-month distribution: 2.97% p.a.


Simulation, investment today 100,000 euros, 30 years with performance assumed above

Result: approx. 900,000 euros

Distribution, assuming that it remains constant: 26,730 euros


$TDIV (-0,61 %) VanEck Morningstar HighDiv

Performance 5 years: 11.07% p.a.

Last 12-month distribution: 3.98% p.a.


Simulation, investment today 100,000 euros, 30 years with the performance assumed above

Result: approx. 2,300,000 euros

Distribution, assuming that it remains constant: 91,540 euros


Now that's a dividend ETF to be proud of. It performed comparatively well in 2022 in particular, unlike the others. This is precisely what makes it interesting as an add-on.

It has a focus on finance.

It is by no means a stand-alone ETF, but in my view it is a great alternative as an addition to generate dividends.


(5Y DivGrowth 7.5%, lies between MSCI World and Fidelity)


____________________________________

Conclusion: In terms of the capital generated, the MSCI World is without doubt the best choice. With regard to the distribution, it is not possible to make such a general statement. In any case, there is no conceivable scenario in which I would choose Fidelity over the MSCI World for a long-term investment horizon and capital accumulation - not management. I simply leave so much capital lying around...


My recommendation for beginners is therefore:

MSCI World, about 70-80%, distributing or accumulating depending on your goal

A small engine (more on this in a moment), approx. 20-30%


For more experienced investors with a dividend target:

MSCI World, dist, approx. 50-60%

VanEck, approx. 15-20%

Motor, approx. 20-30%


I would go for Fidelity if I either have capital and can live off dividends, or if I'm approaching retirement and want to supplement it:

Fidelity instead of MSCI world: 80%

VanEck: 20 %

(Motor, only in the first case: capital to live off distributions and at the same time still aiming for further wealth accumulation)


About the engines:

Of course, the Nasdaq comes to mind and I would go for it in principle. I would also prefer it to the MSCI World IT because, contrary to popular belief, the Nasdaq is not limited to technology. It currently also includes a number of companies from the consumer discretionary and consumer staples sectors, for example. Nevertheless, its performance is of course extremely convincing. I wouldn't care about overlaps with the MSCI world, as they probably wouldn't lead to any company suddenly having a 10% portfolio share or anything like that.


And then I recently dug up something else: $LAB2 (+0,21 %)

Unfortunately, it hasn't been around that long, but the index has been around for 7 years and in these 7 years the index has had a performance of 14.78% p.a., unfortunately no statement for 5 years (Nasdaq in 5 years: 21.62%). So it turns out that it can't keep up with the Nasdaq, but it is not quite so technology-focused and not limited to the USA. I bought it myself because it offers an excess return over the MSCI World and at the same time includes companies that were not previously in my portfolio and shifts my weighting.

The fund invests in strong brand values.

However, because it does not generate such a strong excess return as the Nasdaq, it is not really an engine in the classic sense, but perhaps suitable for a more conservative approach.


PS: The S&P 500 is not included in the overall comparison because all the others have a global approach. That would be somewhat unfair. Of course, its performance is significantly better.


-No investment advice

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42 Comentarios

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The theoretical earning power of your variants in all honor, but one should also mention the cluster risk involved here. Yield at any price should not be the goal of an ETF investor; in most cases, the goal of an ETF strategy should be risk diversification.

A country allocation of well over 70% to 80% in the USA and an overweighting of the big tech companies such as $AAPL & $NVDA of up to 6% of the total portfolio value while outside the top 10 stocks there is already a 0.xx% neglect is not a sensible investment despite all the returns.

There is nothing to be said against taking returns with you, but you always have to be aware of the risks and keep an eye on developments in order to correct them if necessary. But that's exactly what most ETF investors don't do because it's a set and forget thing for them and so the presentation here in the post is clearly too one-sided for me, even if it is well written.
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@Kraemmo I don't have a problem with the lumps right now. US companies operate worldwide. Would you rather have a European company that doesn't generate anything? Europe won't be any good in the long term either. I admit: you have to think about markets like China and India. I have India in my portfolio, for example.
As far as the lumps per company are concerned, if you look at my portfolio and an Apple share that has performed very well, you'll see that I haven't done too badly so far.
However, I understand your objection and, if I were to build it very precisely, I would probably at least make sure that the clumps don't shoot up too high. However, I don't care at all about the countries.
Note also the compound interest effect that you give away if you invest today in a lame cow aka msci Europe or something.

Incidentally, the purpose of the article was to show why DivETFs make no sense (for young investors) and not to work out the perfect strategy. The bottom line is just a basic recommendation. Of course, you can argue about that. There is no optimum - nor will there be.
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@lawinvest I didn't mean it as a criticism of the point of the article because I absolutely agree with you, pure DivETFs simply don't offer any added value apart from the dividend and are therefore nothing for me.
And you can certainly always argue about how big a lump really is in terms of currency risk (e.g. the Fed's interest rate policy) and diversification of the companies themselves by operating globally on the market.

However, and this was important to me in my contribution, it is important to point out such risks because, as you can see from the other comments, there is a certain degree of simple replication. And I think that's wrong because, in my opinion, it should be about understanding and not about a template.
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If you had said something, you could have just used my post and not written your own 😁: https://app.getquin.com/activity/rROZDjNjkK

But it's nice that we both came to the same conclusion.

Here you can find a comparison of the World, EM and ACWI indices since 1987, which is probably a bit more meaningful than the 5 years you used as a basis. It is interesting to note that EM beats the World and the World beats the ACWI (albeit only just): https://www.msci.com/www/fact-sheet/msci-world-index/05830501

I am not familiar with $FGEQ, but is it likely to track an index similar to the MSCI World Quality index? If so, there is indeed a realistic, long-term chance of outperforming the MSCI World. See also https://getqu.in/HhbBYl/

Otherwise I agree with you. Thanks for your contribution
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@DonkeyInvestor I knew that someone once wrote a great post about this, but I forgot who 😇😄 and my intention was to go into the dividend things rather than the Allworld/World Etc. I only did that en passant 😉
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After such comparisons (thank you for your work), I always come to the conclusion - a mixture of everything and you're well positioned. I don't want the usual blah blah blah past is not future and the like. That's why I have such a cuddly muddel Etf depot
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@Iwanowitsch Why sell at all?
Why not let it run and simply expand others?
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Well, the $GGRP in particular naturally comes off unfavorably in the 5-year comparison.
Since its launch (accumulating variant), it had even outperformed the world until recently and its dividend growth was even ~14% p.a..
This year has punished it quite a bit, but that can change again quickly.

I'm not a fan of most dividend ETFs either, but I have grown fond of $GGRP $FGEQ and $TDIV. You can have a really good and relaxed dividend strategy without the market completely running away from you.

Nevertheless, I agree with you that in terms of pure returns, the World will certainly always perform better.
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@Banana_Millionaire Yes, GGRP surprised me too, because I also knew about the outperformance. Nevertheless, those were the obvious facts to begin with.
As explained, I'm not saying that I think it's wrong to invest in them.
I just see that somehow many people here are also considering investing and I am moving very quickly in the direction of these dividend singers (i.e. mainly) beginners and they should really make themselves aware of the differences. => that's what my contribution is for. (Or also in the direction of AllWorlds, which also leaves a lot behind)
Isn't a certain "security" also interesting for beginners? So shouldn't such a dividend ETF be included in principle - even if initially with a low weighting and then higher with increasing age and assets? 🤔
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@PIXELINVESTOR if you hold the $FGEQ in your portfolio for decades, you get an enormously high personal dividend yield through dividend growth. So I think it is also very suitable for younger people with a long-term investment horizon. Just my opinion and approach
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@Max095 I see it the same way and deliberately rely on the combination of market capitalization-weighted all-world ETF $VWRL and quality dividend ETF $FGEQ. My observation: sometimes the dividend increases in one ETF, sometimes the other creates better growth and dividend growth. ergo: I include both in the portfolio and do so for the long term. That will work out 👍
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@Yield-Ahead Good strategy! 😊I have already considered holding only the $FGEQ as a core in my portfolio
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@Max095 so if I were to pick any smart beta ETF as a core, it would undoubtedly be $FGEQ. Why? Because the Fidelity index implements sector and country neutrality to the global equity benchmark and I have fewer structural deviations from the overall market here than with $TDIV, for example. That would be very important to me in the long term. I also think the quality factor makes a lot of sense in connection with a dividend focus. I only have to look at the ETF's top 25 holdings, which is already a convincing selection. The dividend consistency is also controlled via the index (5y div. not negative).
I find the overall concept very coherent for income investors, although a slightly lower TER would be great. Perhaps something will happen in the next few years. I could imagine Fidelity considering a reduction at some point.
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@Yield-Ahead I agree, and you don't always have to try to "perfect" everything. You have to feel comfortable with your investment.
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@Max095 That's it, stay tuned and ignore the background noise. That's it.
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Great post, important for anyone with a long horizon to pay attention to the details listed!

Then again for income investors like me (Bj76), it's not about price appreciation but about capital preservation with distributions if possible, 6-12%/a
This works great today, and is also easy to implement for a time horizon of 10 years.

For all youngsters, it is much better to focus on growth...
Only reallocate later.

GLTA
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@Beeferking76 What does your portfolio or strategy look like as Bj. 76?
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@ElMajor e.g. invested in $SPYI $QQQI $IWMI $PBDC $PFFA $BME $SVOL $XEI $STW $CHDVD $NETL $RFI $CLOZ $JBBB, something more specialized with $FSFL $BRLA $BRWM and something typical like $VICI
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Thank you Peter, very interesting. Are you already living off the "income" or are you planning for a "regular" retirement in your mid-60s? I'm 75 and am thinking about when I should switch from the broad world to income or bonds. So far I'm sticking with the world, but I haven't read up on the other two areas either and I have the feeling that I'm leaving too much return behind 15 years earlier...
Where and how did you get yourself in shape?
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@ElMajor It will take another 10 years, maybe less, to cover family expenses. Everything is reinvested, and everything that is left over from the salary at the end of the month is invested, so there is a little more payout every month. Taxes have to be deducted, but it's still insanely fun to watch it grow every year. I switched to income investing in 2019 after leaving a lot of money in BioTech, among other things. Self-taught via YT and SeekingAlpha (have booked a subscription).
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Very nice post!
I'm always trying to improve and consider other opinions/perspectives, so here's the question: do you think it would be worthwhile to shift the $VWCE into the MSCI (accumulating) you mentioned?

ps: Thanks for your contributions, always exciting :)
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@minkz In the end, you have to decide for yourself. The opinion here in the community seems pretty clear to me: no way.

I think my calculation above shows quite clearly (and it is also so clear over 10 years p.a. performance) that the answer is yes.

Nevertheless, you can't go wrong with the All World either. However, I would perhaps add ETFs with potential excess returns a little more.
And whether you reallocate is ultimately also a question of taxes and costs.
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@lawinvest Thank you! :)
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Thanks for the post 🙂 is the All-World (above, $VWRL ) linked incorrectly? 🙋🏻‍♂️
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@jm_finance Thank you, just corrected
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So go All In Nasdaq and sell a few percent every now and then when you need cash. That's possible!
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Cool contribution! I personally prefer the $SCHD for dividends as it costs little and still performs well. At the moment from the end of Dec 14 to the end of Dec 24 it is actually performing 39% worse than the $HMWO but was last better than the MSCI in Feb 23 (since Dec 14). Now you can actually say you are leaving money lying around, but it always depends on the investment and the index manager. The SCHD has lost performance in recent months... (all figures from BB Terminal)
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@WolfOfBahnhofstrasse yes, although it should be noted that it is a 100% USEtf and should therefore be measured against the S&P500 rather than the Msci world...
@lawinvest You're probably right - my mistake. I'm very US-oriented anyway. VOO is number 1 for me, followed by Tesla :D
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@WolfOfBahnhofstrasse I'm all in on the US side ;)
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Very nice contribution, thank you. What do you think of the S&P 500 as opposed to the Nasdaq as an engine?
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@pinguin- It's similar to the L&G. It doesn't outperform the World by that much either. In addition, the number of overlaps between S&P and MSCI World seems to me to be somewhat higher. Personally, I would consider the S&P as an alternative to the MSCI World. For example, I had also considered combining the two and thus pulling up certain companies that are weighted higher in the S&P than in the World, but that's really small...
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3Semana
Thanks for the very good contribution! 💪
Very well summarized, but I see a mistake in the calculation. What happens to the dividends paid out over the 30-year investment period?
I would certainly pay them back into the respective ETF. 🤔
It would be interesting to see what the calculation looks like in the end.

At the moment it's clear, World ETF and that's it.
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any payout just "for the feeling" is not well thought out, anyone who does this has not understood how the interest effect works (unless you need the payouts, of course).

The €100 in dividends that you put on your current account today instead of reinvesting will be €470 in 20 years at 8% p.a. Doing this just "for the feeling" over 20 years is simply expensive.
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It's the mix that counts! I have around 70% MSCI World and 30% Dividend Growth ETFs in my monthly ETF savings plan and feel very comfortable with them. The dividends (now €350 gross per month) motivate me immensely and will "provide" me with a nice passive income in old age :)
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