Two-Bucket Investing Strategy: Income Strategy vs Total Return
You might have heard your parents or even grandparents talk about buying individual securities. Specifically, the ones that pay dividends. Many investment experts will agree that this approach to investing is not sustainable in the long term. However, dividend-paying stocks have come back in the news recently. With interest rates now rising, people are more focused on yield. This is only natural, but you need to understand the contrast between two different approaches.
Dividend-Paying Stocks vs. Total Market Stocks
Our investment manager ran some numbers based on historical facts for a potential 10-year future scenario. It’s important to understand that only some industries pay high dividends. Therefore, a dividend-focused approach to investing in stocks can lead to a non-diversified portfolio. With that, you’d end up missing out on another important aspect of an investment portfolio: growth.
Therefore, the scenario created showed two types of portfolios, one that was heavy on dividend stocks. We called it SDY. An ETF focused on dividend payers. Compared to SPTM, which represents a total US market portfolio. Now, this is a very diverse portfolio, also containing dividend-paying stocks, but not limited to that. In a 10-year forecast based on the history of the stock market, SDY yielded $419K in distributions. Its ending value was $2.1M. The SPTM yielded $504K in total distributions and its ending value was $2.4M.
That is a total value of $2.9M in the SPTM. Opposed to a $2.5M in total value for SDY. This goes to show the importance of a diversified portfolio. For an optimized return on your stock market investments, it’s essential to focus on value and growth.
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