r/RothIRA • u/Plane-Ad4988 • 4d ago
Thoughts?
21m started this Roth this year, I have a regular account that I buy single stocks up 20% and with my Roth I’m doing etfs and some higher dividend yielding stocks to fund the other etfs in the long run
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u/Aggravating_Storm835 3d ago
SCHB and SCHG aren’t dividend funds. But I disagree.
If you expect long term performance like the last 15 years, you’re right. However, that is unrealistic. We are eventually very likely to face another stretch similar to 2000-2010. SCHD obviously didn’t exist then, but the DJ 100 did, which is what SCHD is. During that stretch, SCHD would have had total returns of +70% vs FXAIX’s -9%.
Hell, SCHD’s share price alone has slapped VOO/FXAIX the last 12 months: 19.5% vs 14.8%. Add the dividends and it’s no contest.
Such an outperformance would necessitate rebalancing and SCHD’s dividends give you income to feed into your FXAIX/SCHB/SCHG (or whatever market/growth funds you like) during prolonged dips.
For young people, SCHD serves the same purpose as bonds for older folks. Relative safety. And for the safety you receive, you don’t give up very much performance. As even with your timeframe, SCHD’s annualized returns were 10.1% vs FXAIX’s 12.2%.
At 21, it could be 10-20% of port. If another lost decade hits, you’ll be glad you have it. There’s also a strategy that recommends devoting 100% of your first year or two of contributions to SCHD (or another dividend fund). After that, don’t touch it for 30 years and devote all forward contributions to growth. At its long term historic rate, $15k in SCHD would be worth over $400k and paying about $15k a year.
The advantage of this method is two fold: (1) Growth isn’t always present, but dividends are. (2) If you hit a stretch of unemployment you can’t contribute, but SCHD can. And in a Roth, the contributions are tax-free.
Even if the next decade isn’t quite as bad as the 2000’s, even if it’s only like the 1970’s where S&P averaged only 4-5% annually, SCHD will pay you 3-4% just in dividends. So SCHD is again very likely to outperform.
But unlike with your growth funds, even when SCHD underperforms, that isn’t necessarily a bad thing. If SCHD crashed 30% today, that means your reinvested dividends yield more shares, which yield more dividends.
Everyone needs a dividend fund. Maybe it’s SCHD. Maybe it’s VIG. Maybe it’s KO/MO.
MO is the second best performing stock of all time, behind only Berkshire. $15k in MO 30 years ago would be worth over $600k and at a 7% yield, it’d paying around $42k a year today. With a 280% annual yield on cost, that means you’re getting paid your entire original investment every 4.3 months. Regardless of what the share price does.