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“Dividend” Index Fund
Published on the Motley Fool: Will Dividend Stocks Survive?
I remember when the Motley Fool was first launched in 1993 by two optimistc brothers who felt that anyone could pick stocks. Now it seems that the entire site is a sales pitch for their newsletters. Turns out that not just anyone can pick stocks - at least not as well as Motley Fool newsletter authors 
The article suggests that there should be a debate about whether or not Dividend ETFs are a good idea given the recent decline in the markets. The idea is that people who bought stocks for their dividends are now facing capital losses.
Framing the debate in this way is flawed. The real question should be: Does it make sense for a long term investor to treat the presence or absence of a dividend as a criteria suitable for defining an asset class?
The answer is “No”. Paying a dividend is one approach to rewarding shareholders. So are stock buybacks. So are making wise investments in the business that will drive growth. Further, dividends are not guaranteed - they can be decreased at any time - so they aren’t a reliable source of income through all market conditions the way that bonds are.
The 3-factor model is widely accepted as the best depiction of which variables drive long term differences in returns. None of the factors relate to dividends:
- Equity Markets: meaning equities have higher return and risk than than bonds. This is the classic “Beta”
- Company Size: smaller company stocks have higher returns and risks than larger companies
- Book-to-Market: lower-priced “value” stocks have higher expected returns than higher-priced “growth” stocks
When I build portfolios, I often include a value or small company tilt, meaning that we slightly overweight small and value companies in the portfolio relative to their actual market cap versus the S&P 500. The extra risk of these investments is mitigated by having a sensible fraction of assets in bonds. I’ll typically do a small company tilt both domestically and internationally.
