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Are Dividend ETFs A Good Investment For Couch Potato Investors?

Published Sun, 25 Nov 2018 05:15:03 -0500 on Seeking Alpha

Q: I am a 63-year-old retired Couch Potato investor. I haven't seen any unbiased (meaning unsponsored) information about dividend ETFs. Have you got any thoughts or recommendations on those?
- Mike
A: A rational investor should consider a dollar of dividends to be equivalent to a one-dollar increase in the value of a stock or fund - at least before considering taxes. But many investors show a strong preference for dividends: there's something about a "bird in the hand" that makes those regular payments so attractive. As a result, fund providers offer a wide range of dividend ETFs for income-oriented investors.
I generally recommend sticking to "total market" ETFs that hold hundreds, even thousands of stocks, whether or not they pay dividends. These usually offer broader diversification and lower cost, and selecting companies that pay consistent dividends or have better-than-average yields should not be expected to boost returns over the long term.
Dividend investors may balk at that last statement, pointing out that (at least according to U.S. data) companies that paid steadily increasing dividends over the last 25 years did indeed outperform the broad market. But the problem with that finding is it suggests investors 25 years ago could have known which companies would go on to raise their dividends over the next 25 years, which of course is impossible. (This is a common error called look-ahead bias.) Identifying companies that raised their... Read more