I have an important dilemma to debate right now. When it’s time to talk about investing, I have 2 convictions:
– Index investing is probably one of the best way to make money without worrying too much about the trades to make.
– Dividend investing is also a great way to build a strong portfolio that generates income.
And yet the 2 strategies are not serving the same purpose:
– Index investing is looking forward to produce long term growth.
– Dividend investing is looking to produce a steady flow of income right now and benefit from an eventual growth.
But what really bugs me in this dilemma is not the purpose of investing but the results you get when you compare the 2 strategies (beware, this is going to be ugly!):
In order to make a comparison between index investing and dividend investing, I have taken one of the best index funds vs one of the best dividend funds. How did I choose them? I looked at established mutual fund companies and took funds that have more than 10 years history to be able to make a real comparison. Then, I took one of the best yields for both of them (looking at 3, 5 and 10 year annualized yields). So I have the Altamira Canadian Index fund Vs the RBC Dividend fund. Since the Altamira fund was created in 1998, I had to take this point to make the comparison. So here we go (click on image to enlarge)
So there are 2 things that you can see while comparing index investing vs dividend investing:
#1 Over the past 11 years, investing in dividends shows a better return.
#2 When you look at the annualized rate year by year, you can see that the index funds will out beat the dividend fund easily in periods of growth but drop rapidly and lose the advantage as soon as it hits a market drop.
So, after looking at those two graphs and taking a good sip of coffee, I still wonder if it really worth it to suffer bigger fluctuations and ending-up with a smaller yield with an index.
On the other side, there are a few considerations to take for the upcoming year if you think of buying a dividend fund versus dividend stocks:
#1 Growth is unlikely to come from Canadian banks. They will do fine but I don’t see them increasing their profits like Apple!
#2 If you buy dividends funds, they usually include bonds and preferred shares. Therefore, their value will drop upon increases in interest rates.
#3 If we are going to enter another period of economic growth (most major companies in the US show strong financial results), chances are that index investing will be a winner for the upcoming years.
#4 We are taking 11 years to make the comparison where we had 2 majors economic crisis. If we take the same 11 years period in a few years, we would start our calculation after the techno bubble and chances are that the same graph will show different numbers.
So I’m still not convinced which one is best for a long term project…
What about you? Dividend investor or Index investor?
and if you want to learn more about dividend investing, I suggest you go look at our new blog; The Dividend Guy Blog.
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