Vanguard ETFs for dividends

[Dona Ferentes]

...Im a newbie into investing...

at least you are saying investing, not trading or, horror, speculating

ETFs are just a bunch of products. Maybe you should see it another way. Think about "Managing the risk, and the returns will follow/ look after themselves."

 

[qldfrog]

DD for drawdown
The percentage of portfolio value you are ok with losing during its life
https://www.investopedia.com/terms/d/drawdown.asp

 

[InsvestoBoy]

Everyone has raised some good points about caution but nobody has raised the most important and obvious points of all:

Firstly:
9 times out of 10, when your investment pays out the dividend, the share price declines by a commensurate amount!

As soon as the business returns some capital to you in the form of a dividend, the share in that business is immediately worth less by the same amount.

The dividend is not your "return" per se, the return was already generated (hopefully) by earnings. The dividend is simply a transfer of cash on the business balance sheet, to your own balance sheet as a partial owner of the business.

Secondly:
Over the course of 1 year, the volatility of the asset will fluctuate by a lot more than the dividend amount. You could invest on Day 1 and see the asset price down by the entire expected annual dividend by Day 2, in a relatively normal market.


You can't invest in long duration assets with an expectation of short term returns.

 

[InsvestoBoy]

Here's the rolling 21 day volatility of VHY, as you can see over any given 21 business day period, very often the asset has fluctuated by more than the total annual dividend including franking credits:

 

[Dona Ferentes]

Everyone has raised some good points about caution but nobody has raised the most important and obvious points of all:

9 times out of 10, when your investment pays out the dividend, the share price declines by a commensurate amount! ............ You can't invest in long duration assets with an expectation of short term returns.

Yes, true; over the short term (in fact, with Dividend Imputation, I'd reckon the drop is more pronounced than the actual divi. The advent of "so-called Income Funds" such as ETFs and PL8, Plato, etc has exacerbated dividend scalping. The 45 day rule did trim that practice back a bit.

But over the longer term, investing is for income or gain. As Dr John Hussman states: "Every long-term security is nothing more than a claim on some expected future stream of cash that will be delivered into the hands of investors over time." He goes on to say, "For a given stream of expected future cash payments, the higher the price investors pay today for that stream of cash, the lower the long-term return they will achieve on their investment over time."

 

[willoneau]

Hi
DD is Draw Down and I see you are prepared to tolerate 20%.
What strategy will you use if you see 20%?
eg trailing stop to close position at 20%
or is it buy and hold for 12 months?

 

[Bill M]

Since you hold VHY, can you shed some light on CG on dividend payouts as Belli has called out. Thanks!

Yes I can, it doesn't affect me because mine is all in my super fund and I am in pension mode, so no tax.

But I can say with some confidence that when I held the likes of SYI, VAS and VHY outside of super I didn't have any problems either. You see at year end at around August the ETF's send you an annual statement clearly telling you where to insert all your bits and pieces at tax time. So wherever there was CGT, it would say something like "insert at item J" and then that is what you do. I handed these annual summaries to my accountant, I think it took him around a minute to enter each one on my return. It wasn't that bothersome to be honest, it's all laid out for you and what they give you is what they give the Tax Office, so just enter as is.

 

[willoneau]

Yes, true; over the short term (in fact, with Dividend Imputation, I'd reckon the drop is more pronounced than the actual divi. The advent of "so-called Income Funds" such as ETFs and PL8, Plato, etc has exacerbated dividend scalping. The 45 day rule did trim that practice back a bit.

But over the longer term, investing is for income or gain. As Dr John Hussman states: "Every long-term security is nothing more than a claim on some expected future stream of cash that will be delivered into the hands of investors over time." He goes on to say, "For a given stream of expected future cash payments, the higher the price investors pay today for that stream of cash, the lower the long-term return they will achieve on their investment over time."

Nick Radge has a system of buying X number of months before expiry and selling just before to gain the price move leading up to the dividend payout. (stocks paying dividends though)

 

[gretrust]

Hi
DD is Draw Down and I see you are prepared to tolerate 20%.
What strategy will you use if you see 20%?
eg trailing stop to close position at 20%
or is it buy and hold for 12 months?

At this stage (beginner), I would probably cut my losses and stop to close.
Depends on how bad the market looks though, I dont see a urgent need for the invested amount so depending on the situation may buy and hold for a bit longer, ...unlikely as it may sound.

Looking at the signs, now is not a great time to invest for good returns, however there's no way to tell how the stop to the bull run will play out.

Been reading about a 60/40 split in ETFs/Bonds to buffer the downfall. Would love to hear thoughts on a similar strategy that members here have used with BONDS combination, national or international?
Hope I am not wrong in assuming some veteran players have adjusted their strategy with BONDS in the mix given the flow of things today.

 

[gretrust]

Here's the rolling 21 day volatility of VHY, as you can see over any given 21 business day period, very often the asset has fluctuated by more than the total annual dividend including franking credits:
View attachment 99409

Thank you for the insight. Learning everyday!

Happy New year everyone!

 

[willoneau]

At this stage (beginner), I would probably cut my losses and stop to close.
Depends on how bad the market looks though, I dont see a urgent need for the invested amount so depending on the situation may buy and hold for a bit longer, ...unlikely as it may sound.

This is were fear steps in and we don't pull the trigger to get out, then watch it drop another 20 to 30%

 

[qldfrog]

This is were fear steps in and we don't pull the trigger to get out, then watch it drop another 20 to 30%

You need to know what you will do, now, before any problem and put that maybe in writting so that you can refer to it later: if you go with the flow and join any panic sell or panic keep(it will come back, sure, it can not...) you will most probably do huge mistake and be very bitter about it;
Know how you get out before going in would be my advice

 

[willoneau]

You need to know what you will do, now, before any problem and put that maybe in writting so that you can refer to it later: if you go with the flow and join any panic sell or panic keep(it will come back, sure, it can not...) you will most probably do huge mistake and be very bitter about it;
Know how you get out before going in would be my advice

I agree , know were your wrong and get out . No if, buts or maybe's

 

[aus_trader]

Been reading about a 60/40 split in ETFs/Bonds to buffer the downfall. Would love to hear thoughts on a similar strategy that members here have used with BONDS combination, national or international?

Given that the share market is on a possible high, it's probably better to go for a split between Stock ETF's and Bonds as it will smooth any sell off or DD. % is up to you but generally speaking the higher the Bond %, the smoother and shallower the drop or DD.

So why not go all in on the Bonds and have the lowest volatility rather than being recommended the split? That's because the Bonds generally yield a much lower rate of return than the stock market. In ball park figures Bond returns are below 3% and stock returns are around 5% and could be higher with franking credits to dividends added. So it's a question of risk vs reward to work out the % you wish to split between the two asset classes.

 

[gretrust]

So why not go all in on the Bonds and have the lowest volatility rather than being recommended the split? That's because the Bonds generally yield a much lower rate of return than the stock market. In ball park figures Bond returns are below 3% and stock returns are around 5% and could be higher with franking credits to dividends added. So it's a question of risk vs reward to work out the % you wish to split between the two asset classes.

Yes, that's good advice and I have considered that. To add to this HSBC are offering 2.35% for balances upto 1mil and Im going for that at the moment. I'll do some research on BONDS but wanted to check any specific picks by members here.

 

[Dona Ferentes]

.... HSBC are offering 2.35% for balances up to 1mil and I'm going for that at the moment. I'll do some research on BONDS but wanted to check any specific picks by members here.

if you buy OTC Bonds through, say, FIIG, as a retail client, the spreads will cruel your returns, if held for a short term (< a year or so).

Alternatively, there are myriad unlisted Bond Funds but this is a tricky space; also minimum MER is 0.5%pa and often higher. So then you look to get more than the 3% the safe (Investment Grade) funds offer, and further out the risk curve, there's always default and other risks. And a crowded trade if things turn pear-shaped - there may be no buyers!

Maybe you could look at Hybrids offered by the banks, where you get maybe 4-5% including franking. Can buy these on ASX so brokerage is extra. The major Banks have lifted their CET1 levels to above the minimum mandated by Basel III, as a buffer. An "Income Fund" will include a generous mix of Hybrids.

*OTC : Over The Counter
*MER : Management Expense Ratio
*CET1 : Common Equity Tier 1 is a component of Tier 1 capital that consists mostly of common stock held by a bank or other financial institution. It is a capital measure that was introduced in 2014 as a precautionary means to protect the economy from a financial crisis.

but basically, for less than a year, I'd go "Return OF Capital" rather than "Return ON Capital".

 

[barney]

I'm a Spec guy so just listening in here … but learning from you chaps above … good info

 

[willoneau]

Everyone has raised some good points about caution but nobody has raised the most important and obvious points of all:

Firstly:
9 times out of 10, when your investment pays out the dividend, the share price declines by a commensurate amount!

As soon as the business returns some capital to you in the form of a dividend, the share in that business is immediately worth less by the same amount.

The dividend is not your "return" per se, the return was already generated (hopefully) by earnings. The dividend is simply a transfer of cash on the business balance sheet, to your own balance sheet as a partial owner of the business.

Secondly:
Over the course of 1 year, the volatility of the asset will fluctuate by a lot more than the dividend amount. You could invest on Day 1 and see the asset price down by the entire expected annual dividend by Day 2, in a relatively normal market.


You can't invest in long duration assets with an expectation of short term returns.

Hi ,
how about a system were you took profit equal to expected dividend plus trading expenses when price moves by that much?.
Then buy again X-div after price drop to do it all again.

 

[sptrawler]

Hi ,
how about a system were you took profit equal to expected dividend plus trading expenses when price moves by that much?.
Then buy again X-div after price drop to do it all again.

I think that has a lot of merit, especially if you aren't interested in the franking credit, the price post dividend on a lot of occasions falls further than the dividend.
It would be worth tracking to ascertain which shares follow that trend. IMO
This plan would be helpfull, if you had a few capital losses, to write off against any gain.

 

[aus_trader]

Yes, that's good advice and I have considered that. To add to this HSBC are offering 2.35% for balances upto 1mil and Im going for that at the moment. I'll do some research on BONDS but wanted to check any specific picks by members here.

I think Dona Ferentes has covered a lot of the ground for you.

In terms of risk rating, Government bonds are rated the safest as they are unlikely to default, usually rated "AAA" or very close to it by the rating agencies such as Moody's and Standard & Poor's. How can they default if they can print their way out of any debt obligations ?

As mentioned, then comes Corporate bonds such as those offered by banks which offer higher yield but are slightly lower rated, but still investment grade.

It goes all the way down to 'Speculative' area or as the American's refer to as 'Junk Bonds', where the "Credit Default" risk increases the lower you go. See diagram below for further information: