Is Dividend Investing a Bad Idea?

This is a dividend blog, and I am biased toward dividend-paying companies.

Dividend-paying companies are generally mature, have lots of free cash flow, and prioritize the investor over the company’s management. No, they are not focused on taking “moonshots” to invent new products and break into new markets, but they are responsibly run cash machines.

But when you put a chart of the S&P 500 total return over a dividend-focused ETF for a long period, it’s tough to see a difference in stock market total returns including dividend.

S&P 500 Total Return

SCHD Total Return

Comparison

So that’s 11.77% total annual return for the SPY index fund, versus 10.93% for the famous SCHD fund.

So, in actuality, you’d earn slightly more investing in the S&P 500 than just a subset of dividend-paying stocks. The SCHD is supposed to screen out companies that have a dividend that is unsustainable and filter down to the “top 100” prospects from the bunch that remains. And they can’t beat the top 500 companies.

What about DGRO?

I have a lot of money in DGRO as well. Can it beat the S&P 500 over 10 years?

Well, it hasn’t been around for 10 years. But in the past 5 years, it’s underperformed as well.

So, What Now?

This video by Everything Money woke me up to the idea that these dividend ETFs are not really delivering the promised goods. Plus, I’m paying increased taxes each year from the cash flow. Cash is nice, but I don’t need the cash just yet.

I also listen to Ben Felix, but Ben talks at a higher level than I can really understand. Ben digs into the scientific research of stock market returns.

He says, “Dividends are irrelevant. Basing investment decisions on dividends does not make sense.”

This feels like I’m questioning my faith here.

I should just put 50% of my investments into VOO (Vanguard S&P 500 Index) and forget it.