# Monthly Dividend and Drip - Does it help in long term ?



## Gujju (Feb 26, 2016)

Hi,

I have found a good etf which is designed to give monthly dividend of 0.7-1% and has a good track record of giving it (6-7 years). However, the value of the etf has been consistent in last 6-7 years mainly as it is designed for dividend income. 

I am thinking of doing drip on it and let it grow for long term. Obviously etf will be in TFSA / RRSP to let it grow tax free.

Do you think this is a good strategy as technically interest (dividends) is compounded monthly and it will grow tax free for years ?


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## l1quidfinance (Mar 17, 2017)

To provide a better opinion on the strategty we would need the ticker for the etf. 

From there we can determine how the yield is created. My guess is that a large portion may well be ROC 
What strategy is the ETF? Covered call? Pref Shares? Etc


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## OnlyMyOpinion (Sep 1, 2013)

But you recognize that you are probably limiting your growth to the dividend. This is not the best way to grow your assets when you are in accumulation mode. It may be fine if the focus is on income when you are in deccumulation mode (i.e. retirement). Total return is what matters if you want to grow your assets (dividend and expected $/unit growth).

I wouldn't say never though. Such a holding might form a conservative part of your portfolio. Your approach will grow the number of units you own over time and if unit price stays constant the nominal value (before inflation) of your holding will increase. In fact, some of these income-oriented funds do show modest growth in a favourable market, and keeping the payout constant may be a priority of the particular fund even in droppping markets.

Consider what MER it has as well. Some are pretty hefty.
You need to consider this in the context of your overall financial plan, which includes your saving and investing goals - then you can consider the funds that will meet your objectives.


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## Eclectic12 (Oct 20, 2010)

Gujju said:


> ... the value of the etf has been consistent in last 6-7 years mainly as it is designed for dividend income.
> I am thinking of doing drip on it and let it grow for long term. Obviously etf will be in TFSA / RRSP to let it grow tax free.
> 
> Do you think this is a good strategy as technically interest (dividends) is compounded monthly and it will grow tax free for years ?


Trouble is ... income is growing due to more units but the steady value of the units means the growth is limited to income paid + commissions avoided + whatever the average of the buys ends up being.

Depending on what the breakdown of the income paid is - it could be even less growth as return of capital (RoC) paid could just be the same money being cycled around.


If you want growth over the long term, IMO you need something that has price that is growing.


The ETF ticker, as mentioned in post #2 would help assess what is what.


Cheers


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## AltaRed (Jun 8, 2009)

While I agree someone in accumulation mode likely shouldn't be focused on an income ETF, putting it on DRIP to buy new units automatically is a good way to optimize the return of the ETF. As noted, best these things be in a registered account to avoid the headaches of adjusting ACB all the time. 

The OP should be aware that with synthetic DRIPs, only whole units are purchased, with the residual staying in cash. Example: Distribution is $47 and unit price at time of dividend re-investment is $10. That means there will be 4 units purchased and the other $7 remains as cash in the account.


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## AltaRed (Jun 8, 2009)

Duplicate deleted. @)%(@*% forum and its @@)%(@*% lag......


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## james4beach (Nov 15, 2012)

When the ETF is creating that big distribution, its share price is automatically knocked down by the same amount as the distribution. Reinvesting the distribution does _not_ create a compounding effect, because the distribution is not "free money" to begin with -- unless it's bond interest.

I don't recommend looking for a high yielding ETF just to be able to DRIP the distributions. You would just be fooling yourself into thinking you are boosting your return. Most high yield income ETFs that I know of actually have lower total returns (meaning DRIP'ed returns) than equivalent regular ETFs.

The purpose of large distributions is to provide automatic, routine cash extraction... usually something retirees want. There is pretty much no point in choosing a high yield ETF for its high yield and then reinvesting all that distribution. You effectively turn it back into a non-high-yield ETF, but a worse version of what you can do with traditional ETFs.


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## AltaRed (Jun 8, 2009)

We shouldn't slay the horse just yet. It might be a camel or a donkey. Monthly distributions certainly suggest an income ETF but I am not going to jump to conclusions (yet). Let's hear from the OP.

As usual, I will take some exception to James' first paragraph. Technically you are correct...for about one minute or perhaps one day. Equity markets don't behave that way because stocks are a 'random walk down wall street'. They trade at what investors think they are worth at the time. I suspect it would be rather rare for an equity ETF to trade down the exact amount of its distribution ex-dividend day though I've never spent any time being interested in finding out.


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## james4beach (Nov 15, 2012)

Share prices declining at ex dividend is a stock market "law", it's not a theory. It's true that prices have daily, somewhat random movements but this is a separate thing than the inevitable drop at the time a dividend is paid out. If you separate out the two, for example by looking at average % change on ex dividend dates and correcting for the broad stock movements at the time, you can actually see the price declines at ex dividend quite clearly. But it requires looking at some numbers and understanding that (a) price decline at ex dividend and (b) daily random movements are two different things. The fact (b) always happens does not erase (a). It just masks it.

In engineering/signals terms, I would call it a superposition of (a) and (b). Yes it's difficult to see that (a) is happening, but that's the kind of confusion that always results from superposition.

I'm currently in Australia. Here is how the TV news reported the shares market yesterday, almost verbatim: "a rough day in the markets with many shares showing large declines... some major stocks were trading ex dividend, contributing to the declines seen today".


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## l1quidfinance (Mar 17, 2017)

James 

Whilst what you say is true about the ex dividend date if the unit gives a true say 7% return through dividends then you can compound the growth by reinvesting the same as with interest. 

You seem fixated to the point you are suggesting that the price will continue to fall on every ex dividend date. This simply isnt true. 

Let's take away the random market forces for one second. 

The etf Trades at $20 and the pays out say a 10c monthly ditribution. On ex day the price will drop by that amount. During the course of the month the underlying companies are busy earning money thus replenishing the distribution pool back to the round $20 ready to pay out the following month. 

In this scenario you can indeed compound the return by reinvesting the distribution. The danger comes from Return of Capital or Covered calls where the etf is under mandate to buy back holdings that were just called and therfore eating up it's own capital.

Edit to add the majority of Australian shares pay only 2 dividends a year. Interim and Final, resulting in this having a much more visible affect when there share trades ex div.


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## doctrine (Sep 30, 2011)

It's not the dividend that causes these income ETFs to typically fall over the long term. It's the fact that these ETFs typically overpay on the dividend beyond what the underlying holdings generate and have to pay out capital, essentially giving you your money back slowly over time. Eventually the ETF has to reconstitute in some way or cut the distribution. Yes stocks drop ex-dividend, but that should be considered separately from the stock price drop in income ETFs. A far better comparison is stocks that pay out more than 100% of net earnings in dividends; they are really just paying the dividend out of stockholder's equity, which eventually isn't enough to sustain the dividend and the capital structure has to be adjusted and/or dividend cut. And then the dividend cut usually massacres the share price, which compounds your returns in the negative direction.

Some of these income stocks really thread the needle because the underlying holdings generate a lot of capital gains; think Enbridge from 2010-2015. But eventually those stocks will stop going up 10-20% a year and may go down, which makes it very hard to sustain fixed distributions. As long as (total return of underlying holdings > distribution + fees), it works out, but virtually all of these funds have to sell shares in the underlying holdings because there simply aren't that many companies yielding 6-7% dividends sustainably.

Another comparison would be relying on stocks for income yourself, but occasionally selling shares and withdrawing cash instead of just taking the dividends. Your dividend stream is very likely to decrease over time in that scenario, certainly it will be lower than if you had not sold shares.


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## fireseeker (Jul 24, 2017)

l1quidfinance said:


> The etf Trades at $20 and the pays out say a 10c monthly ditribution. On ex day the price will drop by that amount. During the course of the month the underlying companies are busy earning money thus replenishing the distribution pool back to the round $20 ready to pay out the following month.
> In this scenario you can indeed compound the return by reinvesting the distribution.


Yes, that's compounding, but I believe what James is asking is: What's the point?
Imagine you buy an ETF at $20 that doesn't pay a distribution. At the end of the month it is worth $20.10. At the end of the next month it is worth $20.20+. In other words, it is compounding automatically.
An ETF paying a distribution is adding an extra step to the compounding process, if you wish to reinvest. Plus it's a taxable event.


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## james4beach (Nov 15, 2012)

I challenge the term "compounding" when it comes to the distributions because if you take something away, then add it back, you're not compounding or growing anything. You're just back to where you were initially. If a company is worth $100 million yesterday and pays out $5 million in cash today, *it's obviously not still worth $100 million*. It's worth $95 million ignoring other material factors. And the stock market knows this. The exchange adjusts the price, automatically. People in corporate finance also know this; the money didn't come out of thin air. The cash is simply transferred from the equity value to the hands of the shareholder -- it's a withdrawal.

Here is the sequence of steps in a dividend payout and reinvestment:

1. company equity is worth $100 M
2. company pays out $5 M from equity and is now worth $95 M
3. investor reinvests $5 M back into equity
4. investor ends up with $100 M of equity

^ this is at the moment of dividend. Has nothing to do with corporations earning profit. In this sequence, you haven't generated or compounded anything. You've simply cancelled out the effect of the dividend.

Profitable companies will earn new money which will continuously increase the equity value. That happens totally independently of the dividend payout policy. If no dividend is paid out, the equity value creeps higher in exactly the same way. And it happens more efficiently, by the way.

Dividends are great, and very convenient, and a nice cashflow stress test that keeps management honest, but they do not generate new money. They are just a ledger transaction, a transfer of money out of equity and into cash.

This is why I say there is no point to finding a high yielding stock/ETF and then DRIPing. Nothing is gained through that process. You're just sending cash around in a cycle... inefficiently.


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## humble_pie (Jun 7, 2009)

james4beach said:


> I challenge the term "compounding" when it comes to the distributions because if you take something away, then add it back, you're not compounding or growing anything. You're just back to where you were initially. If a company is worth $100 million yesterday and pays out $5 million in cash today, *it's obviously not still worth $100 million*. It's worth $95 million ignoring other material factors. And the stock market knows this. The exchange adjusts the price, automatically. People in corporate finance also know this; the money didn't come out of thin air. The cash is simply transferred from the equity value to the hands of the shareholder -- it's a withdrawal.
> 
> Here is the sequence of steps in a dividend payout and reinvestment:
> 
> ...





jas4 u are funny .each:

u do recycle this message ^^ over & over again but it's shocking how CMF's unrepentant sinners go right on buying stocks that pay sound dividends

a lot of folks look for stocks w moats, stocks that pay dividends, stocks that perform w some growth features so long-term share price keeps rising if one looks at 10 year chart. Banks, pipelines, food distributors, stuff like that.

jas4 have you not, yourself, supplied 2 perfect illustrations that prove your thesis above to be, alas, a bit wrong. Your 2 stock portfolios. One may be real, one might be virtual only; but we all know we can count on you to be meticulously precise with your reportage.

you set up a 5 or 10 pack that is a kissing cousin of XIU. Big old dividend-paying companies in core sectors that have been around since the grandparents' era. Banks, pipelines, telcos, drill like that.

next, you set up what was supposed to be a no-div or low-div portf. The idea was to see if it would outperform, ie would your above theory hold.

OK you've told us the outcome so far. Low-div-no-div underperforms. The senior portf, consisting of a handful of great big fat rich dividend payors, is in the lead.

oops


.


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## cainvest (May 1, 2013)

Gujju said:


> Do you think this is a good strategy as technically interest (dividends) is compounded monthly and it will grow tax free for years ?


Aside from the potential issues of a company putting out an 8-12% yearly dividend, yes ... you'll get monthly compounded growth.
Like others, I'll wait for the ETF's name to comment on the rest ...


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## l1quidfinance (Mar 17, 2017)

> This is why I say there is no point to finding a high yielding stock/ETF and then DRIPing. Nothing is gained through that process. You're just sending cash around in a cycle... inefficiently.


This I agree with. It is tax inefficient outside of a registered account. I also do not drip dividends as I want to deploy the cash where I see fit at the time. Could be in a stock. Maybe the same stock, etf or my pocket. I want the control and that is why I do not use drips. 

You are compounding though as you are incereaing your ownership in the underlying. Now we are talking about the same 100% efficient market that you reference which drops by the dividend amount on the ex date. Let's use this exmaple using your steps

1) Jan 1st $10,000 @ $20 share for 500 shares 10% yield $0.166
2) Ex day Jan 15th we trade at $19.83 $9915 Paid $83

What this tells us is that we do not by a stock prior to ex dividend with the purpose of only collecting the dividend. 

3) Reinvested we can buy 4 more shares in February trading at $19.83 for 504 total & $3.68 idle cash 
4) Assuming all this happens on ex day we have the same approx $10k
5) Feb 14th prior to ex day the stock is trading back at $20 for $10,080
6) Feb 15th start the cylcle again collecting $83.66 and buying another 4 units with $7.34 idle cash

This is compounding your growth. Possibly tax inefficiently depending on account but it is compounding. 

This scenario is perfectly represented in the price chart of the PSA ETF.


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## Gujju (Feb 26, 2016)

Hi everyone,

Thank you so much for the responses. I will study pro and con of this strategy and decide to go forward with it or not.

The ETF ticker is QYLD. It has traded in the range of $20 to $25 since 2013 and yes, consistently given out monthly dividends. MER is 0.6% which is little bit on the high side.

https://www.globalxfunds.com/funds/qyld/

Thanks


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## l1quidfinance (Mar 17, 2017)

For your purposes I would not consider the covered call ETF. 

If I wanted to extract income then possibly but not for reinvestment. 

If I wanted the exposure to the Nasdaq 100 (which is what you are investing in with this etf) I would look at something like QQQ. 

View the attached for comparison. This just represents price performance and does not consider the cash return of QYLD


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## cainvest (May 1, 2013)

Gujju said:


> The ETF ticker is QYLD. It has traded in the range of $20 to $25 since 2013 and yes, consistently given out monthly dividends. MER is 0.6% which is little bit on the high side.


QYLD is definitely a no go for me, it's upside is severely limited. If you're looking for growth over the long term, look somewhere else.


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## james4beach (Nov 15, 2012)

humble_pie: some stocks are good stocks/companies, and happen to pay dividends, but that doesn't mean that dividend payers have any performance advantage over regular stocks. If dividend stocks _were_ consistently better performers, you would see consistent outperformance by funds like VYM (US), CDZ, ZDV... which isn't the case, even with dividend reinvestment. Just look up the performance numbers. Fund performance is always stated with reinvestment of distributions.

This is the big message I'm trying to emphasize: dividend payments don't boost performance versus the regular stock mix. Same for ETFs: a fund with high yield doesn't have any performance advantage versus the similar or benchmark index it's based off, even when you reinvest the distributions. Call it compounding if you want, but it doesn't boost performance versus the benchmark... and therefore is pointless.

In this case, QQQ is the plain vanilla version for Nasdaq-100. Its 5 year performance is 14.73% CAGR. Gujju asked about QYLD. With the reinvestment of distributions included, its 5 year performance is 6.85% CAGR. Someone who invested in QYLD has forfeited tons of performance and done much worse than QQQ! Finding a high yielding thing and DRIP'ing just is not useful.

And it's the same story for all the Canadian covered call ETFs and other high yield funds. They almost always do worse than the related plan vanilla ETF, even with reinvestment and compounding.


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