Investing for dividends: Shares or funds?
Discussion
Say I wanted to put aside £1,000 every month for long term buy and hold (20+ years)
What is the main advantage of going for tracker funds over picking say 20 stocks over the next few years which I do my research on that have good P/E ratios and pay decent dividends and then monitoring the stocks myself a couple of hours each month, cutting out any deadwood myself and keeping a track on the yields and dividends.
Forgive me for a daft question, but wouldn't this mean that I get more dividends which I can reinvest into shares, rather than buying 1 or 2 tracker funds which will only pay 1 or 2 dividends but then also charge me hefty management fees?
Please clarify for a newbie investor?
What is the main advantage of going for tracker funds over picking say 20 stocks over the next few years which I do my research on that have good P/E ratios and pay decent dividends and then monitoring the stocks myself a couple of hours each month, cutting out any deadwood myself and keeping a track on the yields and dividends.
Forgive me for a daft question, but wouldn't this mean that I get more dividends which I can reinvest into shares, rather than buying 1 or 2 tracker funds which will only pay 1 or 2 dividends but then also charge me hefty management fees?
Please clarify for a newbie investor?
You get dividend income from both - but if you manage your own portfolio you decide what you want to do with the income. With a fund any dividend income is reinvested on your behalf.
If you're interested more in income than growth & self managing check out the Motley Fool Boards that cover High Yield Portfolios (HYP), which I'm a fan of as it helps me forecast more accurately what I expect to live on in retirement. If/when I live my current employer the first thing I'll do is take my money out of the compulsory managed fund and put it in my SIPP.
If you're interested more in income than growth & self managing check out the Motley Fool Boards that cover High Yield Portfolios (HYP), which I'm a fan of as it helps me forecast more accurately what I expect to live on in retirement. If/when I live my current employer the first thing I'll do is take my money out of the compulsory managed fund and put it in my SIPP.
Warren Buffett ("the sage of Omaha") has said many times that the best thing for an amateur investor to do is to buy into a "dumb" fund that tracks a big index. Over the long term you'll be very likely to do better that way than with an actively managed fund or picking your own. I followed his advice.
The main advantages of the tracker fund (provided you pick a low cost one) are the fees will be much lower than regularly swapping in and out of 20 stocks, and you will be much more diversified, which is the only free lunch in investing.
The only way picking stocks yourself makes sense is if it becomes your hobby and you therefore end up investing more than if you're just sticking a grand in a 'boring' tracker every month.
The only way picking stocks yourself makes sense is if it becomes your hobby and you therefore end up investing more than if you're just sticking a grand in a 'boring' tracker every month.
The important thing is to actually start.
While 1K a month is a decent amount it will not give you initial diversification if used to buy shares.
Likelyhood of "butter side down" is high.
I personally prefer balanced or allocation funds over trackers. (I find it sorta wrong to pay a guy to follow the market down
)
However, the cost of trackers and the current level of the indexes do make them a rational choice.
If you still prefer the idea of individual shares and don't mind a little work then choose a "good" fund from a respected house, look at its holdings and pick shares from its major holdings. You still need to check coverage but most the work has been done for you by their analysts.
While 1K a month is a decent amount it will not give you initial diversification if used to buy shares.
Likelyhood of "butter side down" is high.
I personally prefer balanced or allocation funds over trackers. (I find it sorta wrong to pay a guy to follow the market down
)However, the cost of trackers and the current level of the indexes do make them a rational choice.
If you still prefer the idea of individual shares and don't mind a little work then choose a "good" fund from a respected house, look at its holdings and pick shares from its major holdings. You still need to check coverage but most the work has been done for you by their analysts.
ATV said:
What is the main advantage of going for tracker funds over picking say 20 stocks over the next few years which I do my research on that have good P/E ratios and pay decent dividends and then monitoring the stocks myself a couple of hours each month, cutting out any deadwood myself and keeping a track on the yields and dividends.
Out of interest, why are you focused on dividends rather than growth?If you have a 20 year time horizon and are reinvesting anyway then you are deliberately excluding a large number of potential investments.
And as above - I use trackers rather than pick stocks: 1. it's cheaper 2. it will outperform amateur muppetry.
walm said:
Out of interest, why are you focused on dividends rather than growth?
Because I'm not sure I could pick 20+ stocks and predict accurately for growth.Peter Lynch in his book "One up on Wall Street" listed the best performing stocks of the 90s. A $10,000 investment in LOW (Lowe's companies) in 1989 would have yielded $152,000 by 1999. However the same amount in DELL computers would have returned $8.9 million
I'm not sure I could predict a 10 year growth like that, so I'd rather stay safe and have a general mix of say 20+ shares in companies like Coca-Cola or Gillette which pay good dividends for income or reinvestment and *hope* that my capital returns provide a nice nest egg rather than *expect*. It would be great to have both though.
Warren Buffett likes to buy undervalued stocks and then hold forever (theoretically). He's never actually added to his Coca-Cola position since he first bought in the 80s. He too a 9% stake and watched the price rocket over the years to a holding of around $13 billion now. If that investment technique is good enough for the world's second richest man, I'd like to investigate further
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