Is VOO A Good Buy For Dividend Portfolios? Yes, When Bought At These Lower Prices

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Is VOO A Good Buy For Dividend Portfolios? Yes, When Bought At These Lower Prices

seekingalpha2022-03-09

2d illustrations and photos/iStock via Getty ImagesThis is an update to the article I published back on September 3, 2021, which, in turn was an update to an article I had published a year before. The...

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blue sky
·2022-03-12
What is the best price to buy?
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Yes, When Bought At These Lower Prices\n</h2>\n\n<h4 class=\"meta\">\n\n\n2022-03-09 23:32 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4494049-is-voo-good-buy-dividend-portfolios><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>2d illustrations and photos/iStock via Getty ImagesThis is an update to the article I published back on September 3, 2021, which, in turn was an update to an article I had published a year before. The...</p>\n\n<a href=\"https://seekingalpha.com/article/4494049-is-voo-good-buy-dividend-portfolios\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":null,"symbol_name":null,"start_time":0,"source_url":"https://seekingalpha.com/article/4494049-is-voo-good-buy-dividend-portfolios","article_id":"2218123187","we_media_id":null,"thumbnails":[],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2218123187","pubTimestamp":1646839927,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"2d illustrations and photos/iStock via Getty ImagesThis is an update to the article I published back","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{},"translate_title":"对于股息投资组合来说，VOO是一个好的购买吗？是的，当以这些较低的价格购买时","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"161125":0.6,"513500":0.6,"WMB":1,"MO":1,"NEM":1,"DVY":1,"DGRO":1,"CVX":1,"NOBL":1,"OKE":1,"PPL":1,"SCHD":1,"SPY":1,"SPYD":1,"T":1,"VCIT":1,"VIG":1,"VOO":1,"VYM":1,"SPXU":0.6,"SH":0.6,"SDS":0.6,"SSO":0.6,"OEX":0.6,"OEF":0.6,"UPRO":0.6,"ESmain":0.6,"IVV":0.6,".SPX":0.6},"content_text":"2d illustrations and photos/iStock via Getty ImagesThis is an update to the article I published back on September 3, 2021, which, in turn was an update to an article I had published a year before. The point I made in the most recent article was simple: Because of its greater diversification and tendency to see dividends/share grow each year, the Vanguard S&P 500 Pacer Swan SOS Fund of Funds ETF|ETF (VOO), which tracks the S&P 500 index extremely well with only a 0.03% expense ratio, is as good an investment for buy-and-hold dividend investors as are more dedicated dividend ETFs like ProShares S&P 500 Dividend Aristocrats ETF (NOBL) and the Schwab US Dividend Equity ETF (SCHD).  At the time I was writing, both VOO and the dividend ETFs looked seriously overvalued, and, as I explained in this article, seemed likely to suffer if rates were to rise. That made me cautious about buying any of these ETFs for their dividends.  Persistant, Rampant Inflation Is Changing the Way Investors Need to Look at Dividend ETFs A lot has changed since I wrote that article. Inflation jumped to a level not seen since the early 1980s--which happened before most of the civilized world responded to Vladimir Putin's war crimes in the Ukraine by imposing heavy sanctions on Russia's international trade. Now the price of oil has risen to levels high enough to raise the costs of producing and shipping goods for companies around the world.\n This motivates me to take a deeper look at how VOO is performing compared to ETFs that market themselves specifically to dividend-centric investors, with an eye to determining whether it has corrected enough to make it attractive once more for investors who prefer their dividends with a side of growth.  VOO's Dividend History The Fastgraph below gives you the history of the S&P 500's dividends over the past 20 years. Since VOO tracks that index extremely closely, we can use data about the S&P 500 to understand VOO's dividend history.    S&P 500 20 Year Dividend Yield and Payout History Fastgraphs.comThe S&P 500's Dividend Yield Has Sunk Due to Share Price Inflation The brown line on the chart shows you how the S&P 500's dividend yield has fluctuated over time. This chart also makes it clear how the extreme, and difficult to justify, price action that set in after COVID-19 has caused its yield to drop to an all time low, even though the actual dividend paid per share in 2021 was higher than it had ever been. Investors who like to invest in dividend-paying securities at a price that provides a yield that is the same or better than its historical yield would probably only want to buy VOO or any other S&P 500 ETF like the SPDR S&P 500 Trust (SPY) when the S&P 500's yield was at 2% or higher.  The S&P 500's Dividend Payout Per Share Has Risen Consistently and Impressively The amount of the annual dividend per share paid by the S&P 500 is shown along the bottom of the chart. As you can see, that dividend has risen every year over the past 20 years, except for the two years where the market endured recessions caused by extreme crises: 2009 and 2020. Even with those setbacks, the speed with which the S&P 500's dividend has recovered means that investors who bought and held an S&P 500 ETF like VOO at any time over the past two decades have seen their dividends grow at a gratifying rate. If you had bought VOO in 2002, the cash amount of your dividends has grown by 424%! Even if you bought it in 2008 right before it dropped dramatically thanks to the Financial Crisis, your dividend had still grown 46% by 2021. Yes, there are many individual dividend stocks that have grown their dividends by an even higher percentage over this same time, but almost always that higher dividend has come with far less share price appreciation over the decades. And a history of a growing dividend is no guarantee that a company will continue to grow its dividend strongly. Some once-beloved dividend stocks, like AT&T (T) have seen their yields increase but only because their share prices have dropped. AT&T's actual dollar payout per share--before it announced it was cutting its dividend last fall--grew less than 50% over the 20 years when the S&P 500's dividend grew by that 424%.\n The S&P 500 Offers Investors More than Just a Dividend  An ETF like VOO that tracks the S&P 500 has the advantage that over a long stretch of time, its share price will grow, despite occasional setbacks and without regard to what kinds of stocks are temporarily popular with investors. As it is a market cap weighted ETF, VOO's price is always determined by the stocks that are most popular with investors whatever they may be.  But market history is full of periods when the economy struggles and the market as a whole is flat. At those times the wide diversification of the S&P 500 protects your investment and if you have bought in at a time when the dividend is near its average, your growing dividend will provide you income to tide you over.  How VOO's Dividend Compares to that of Dedicated Dividend ETFs  That said, it should come as no surprise that VOO's dividend is lower than that of dedicated dividend ETFs. In the table below you can see the yields of some very popular dividend-centered ETFs and that of VOO. (All yields in the table below are taken from Seeking Alpha for consistency's sake.) Dividend Yields The dividend ETFs compared below are the SPDR® Portfolio S&P 500® High Dividend ETF (SPYD), the iShares Select Dividend ETF (DVY), the Schwab US Dividend Equity ETF (SCHD), The Vanguard High Dividend Yield ETF (VYM), iShares Core Dividend Growth ETF (DGRO), the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), and the Vanguard Dividend Appreciation ETF (VIG).   Trailing 12 Month Dividend Yield of Dedicated Dividend ETFs and VOO   Seeking Alpha Table by the AuthorWith the exception of SCHD, these dedicated ETFs that have paid out higher dividends have seen significantly less share price growth over the past three years, which has made their total return considerably lower than that of VOO.   3 Year Total Return of Dedicated Dividend ETFs and VOO Seeking AlphaIf we flesh out the chart of dividend yields with a bit more data we can see why this might be. Low Earnings Growth Rates Explain Some Higher Yields  I have added the P/E ratio of these ETFs. I have also put in whatever information ETF providers give us about the annual earnings growth rate of the stocks in the ETF. Though as usual, we have no way of knowing how the ETF provider actually calculates this very significant metric.  Several of these dividend ETFs' providers don't report any information about the earnings growth rates of the stocks in their ETFs. My cynical mind suspects that this is because those growth rates aren't ones that you'd want investors to see if you were trying to sell them your ETF. Share prices tend to track earnings growth rates over time. So a low earnings growth rate almost always means you will see less share price growth over time, save for periods like the QE period when income-oriented stocks become popular. \n When we turn to the few ETFs that do provide earnings growth information, we must note that State Street Advisors, SPYD's provider, only reports SPYD's estimated future 3-5 year earnings growth rate, which is often more optimistic than warranted as analysts have a few years to revise their estimates before they are matched by actual earnings. Vanguard's earnings growth rates are the ETFs' 5-year historical average growth rate.   P/Es and EPS Growth Rates of Dedicated Dividend ETFs and VOO   Seeking Alpha and ETF Provider's Websites, Table by AuthorBut the little bit of information we have does suggest that higher dividends are likely to correlate to lower average earnings growth rates. And that in a booming market like the one we have just experienced a low P/E is a sign of very slow earnings growth, or possibly even decline. This makes sense. It is companies whose earnings are growing slowly who have little else with which to lure in investors except a higher dividend.  VOO Excels When We Look at the Missing ETF Metrics that Will Matter Most in the Future When we are evaluating dividend paying stocks, there are some other very important metrics we really need to know, none of which are made public by the providers of dividend ETFs. Payout Ratio The payout ratio tells you how much of a company's earnings go into paying its dividend. If it is high it tells us that the company doesn't have much cash with which to invest in the future. If it is over 100%, it tells us that the company must be borrowing money or issuing a whole lot more stock.  So it is worth noting that none of the ETF providers behind the dedicated dividend ETFs we just looked at tell us anything about the payout ratios of the stocks in their ETFs. This information will be extremely important in an inflationary environment where materials, manufacturing, and salary costs may rise faster than companies can raise prices, causing earnings to shrink. If a company's payout ratio is high, it is likely to have to freeze or decrease its dividend when its earnings are declining simply to have the cash needed to keep operating.  We do know what the composite dividend payout is of VOO because it closely tracks the S&P 500 index, whose provider makes that data public. We can only get a vague feel for the payout ratios of other dividend-centric ETFs by sampling its top holdings and seeing what their current payout ratios look like, a very tedious job when you are talking about quite a few ETFs each holding hundreds of stocks. \n How VOO's Payout Ratio Compares to Those of Some Top High Dividend Stocks  I will continue to assume that VOO tracks the S&P 500 closely enough that we can use the metrics provided for the S&P 500 index to understand its metrics. When we turn to look at 2021 payout ratio of the S&P 500 index, using the data provided by Factset and reported by Fastgraphs.com we find the following:  The S&P 500's Payout Ratio: 29.4%.  When I pick out some of the Top 10 stocks in SPYD these are the 2021 payout ratios I calculate using the information Fastgraphs reports using Factset:  Chevron's (CVX) payout ratio: 65.3% Williams Companies's (WMB) payout ratio: 120% Newmont's (NEM) payout ratio: 74.3%  When I calculate the payout ratio of some of the Top 10 stock sin DVY using data from Fastgraphs, this is what I see:  ONEOK (OKE) payout ratio: 112% Altria (MO) payout ratio: 76.3% PPL (PPL) payout ratio: 158% When Payout Ratios Rise Too High Dividends Get Cut Looking at PPL's Fastgraph chart is very informative because what we see is what we are likely to see happen with a lot of high dividend stocks if inflation continues to eat away at their ability to grow earnings, or even keep those earnings constant.  Fastgraphs.comAs you can see, as this company's payout per share rose to where it was 158% of its earnings per share, the company was forced to cut that dividend by a whopping 42%. Dividend Cuts are Devastating to Companies Bought Only for Dividends What happens when dividends are cut? If the only reason investors were investing in a stock was its dividend yield, the share price plummets. Ask any AT&T (T) bagholder how investing solely for dividends has worked out for them.  As you can see, those who bought and held AT&T over the past five years, as its dividend yield surged, still ended up losing 2.90% a year of their investment even including the \"juicy\" 7% and higher dividends they collected. Now that the company is slashing the dividend these investors have less money with which to buy a new income producing security.   AT&T 5 Year Performance -Annual CAGR of -2.90% with Dividends  FastgraphsI drag up the sorry story of AT&T here because I think it could very well be the canary in the coal mine for a lot more of the high dividend stocks that are giving the dividend ETFs their current, higher dividends. Very high payout ratios will become impossible to sustain if inflation continues.  So dividend ETFs paying significantly higher dividends than VOO may be full of stocks with very risky, high payout ratios. We can't know for sure because ETF providers won't tell us. But this flags the fact that income-seeking investors buying dividend ETFs instead of VOO may be taking on far more risk than they realize.\n VOO, with its higher earnings growth rate and much lower payout ratio has more capacity to survive market and economic downturns and recover from temporary losses both in price and dividend payment per share.  How Much Debt Have Companies Taken on To Support Dividends? The other things the providers of all these ETFs do not tell us is how much debt these companies in the ETF have taken on in order to be able to pay out those much higher dividends. In an inflationary environment, where the Fed will be hard pressed to justify keeping rates near zero, high debt levels will become a severe drag on companies' earnings. Maybe not immediately, but as time passes and companies have to refinance their debt at higher interest rates, possibly much higher interest rates. The poor quality of much US corporate debt is a topic that has been swept under the rug during the years when interest rates have been held near zero. Vanguard gives us a very telling bit of data about its Vanguard Intermediate-Term Corporate Bond ETF (VCIT) that hints at the magnitude of the problem of corporate debt. VCIT tracks an index of US corporate bonds most of which (93.6%) have maturities 5-10 years in the future. Fully 54.4% of these intermediate-term corporate bonds are rated BBB by S&P Global, and it appears that Vanguard lumps bonds from companies with BBB+ and BBB- credit ratings in this BBB group. The BBB- rating is lowest grade of investment grade bonds. If the companies issuing these bonds see their credit rating degraded one more step, their bonds become junk bonds which will cause their borrowing costs to surge.  How much of a decline in earnings and rise in rates would it take for the many companies issuing those bonds to see their credit rating drop another notch to where they become junk bonds?  The answer tells you, again, that your slow growing dividend stocks from companies whose sluggish earnings growth may shrink when the economy shrinks are far more risky than most investors may realize. VOO with its much larger and more diversified holdings and higher earnings growth rate is risky, too, given corporate debt levels now, but it is not as risky.  VOO and Dividend ETFs' Yields Have Sunk to Levels that Show They Are Still Very Overvalued In the Fastgraph near the top of this article we saw how the dividend yield of the S&P 500 (and by extension, VOO) has declined thanks to the surge in stock prices that followed COVID-19. We also saw that VOO would be a far better investment if bought when it was yielding at least 2%, and ideally a bit more.\n It's harder to see what dividend yield is more typical of most of the dividend ETFs as they almost all have a short history. Dividend investing became more popular after the Financial Crisis and it was in the early 2010s that ETF providers started offering dividend stock ETFs. As a result, few of the currently popular dividend ETFs have a history longer than 10 years, and quite a few have histories far shorter. Seeking Alpha's portfolio feature does give us the ability to see the last 10-year history of a security's dividend yield. Unfortunately the short history of most dividend-focused ETFs makes it harder to draw conclusions about what the right dividend yield to invest in them might be. But we must use what we have. Here is what the past decade's worth of dividend yield history of the Vanguard Dividend Appreciation Index looks like.   VIG Dividend Yield History Seeking AlphaAs you can see its yield, like that of VOO, has declined as stock prices surged. This chart might suggest that VIG would not be a wise investment until its yield climbs back to the 2% range, like VOO. This would only occur after a significant drop in stock prices.  How Attractive will Any Dividend Stocks Be When Safe CD Rates Rise Higher? As noted, most of the dividend ETFs only started to trade after the Financial Crisis when bond and CD yields sank lower than those of dividend paying stocks. What would have been considered paltry yields--ones under 4%-- suddenly looked enticing to investors who couldn't find CDs paying even 2%. But we don't really have any history to tell us how dividend-focused ETFs would perform during an extended period of high inflation and relentlessly rising rates--as happened in the period extending from 1974 through 1982.  The threat to dividend stocks comes from many different directions under that scenario. Not only do rising rates pressure profit margins, but many dividend stocks are consumer-oriented stocks. When consumers are faced with inflation, they will find it harder and harder to afford both consumer discretionary purchases and consumer staples.  But the biggest threat to the companies that have attracted consumers with their dividends during this long period of rate suppression is that rising rates may once again provide investors with safer income alternatives.  When I first wrote about the threat higher safer rates may pose to dividend ETFs in this November 2021 article I got a lot of pushback. Investors have done so well with their dividend stocks over the past decade that they assume that they will continue to be safe investments during hard times and even outperform the S&P 500, as some dividend ETFs have over the past six months. But as of now, we haven't begun to see an inflation-driven rising rate environment. The Fed has not yet raised its Federal Funds rate even once. It will have to star raising rates, very soon.  For now dividend stock prices are still coasting on their reputation for safety, though the most recent shocks to the economy are taking their toll. They are losing less than is VOO, but it is important to remember that VOO rose far higher than did these ETFs over the previous five years, so even with a deeper drop, VOO's investors are still better off.  Price Declines of Popular Dividend ETFs and VOO over the Past Month Seeking Alpha5 Year Price Appreciation of Popular Dividend ETFs and VOO  Seeking AlphaToo Many Investors Still Don't Believe Rates Will Ever Rise - But They Will Dividend ETFs are doing better than VOO for now because there are still a lot of investors who are assuming that the Fed will keep finding some excuse not to raise rates, no matter how inflation increases. But that can only last so long. The Fed has a dual mandate and half of that mandate is that it has to fight inflation. Even if the Fed never acts aggressively, if inflation keeps running at 7% or higher, lenders will take things into their own hands as they have in the past. If you aren't aware of the history of the \"Bond Vigilantes\" you might want to read up on them. As inflation surged in the 1970s, rates rose, long before Paul Volcker took over the Fed and began aggressively raising the Fed funds rate to curb inflation. Rates averaged 13.74% in 1980 before Reagan was even elected.  CD Rates Are Already Rising  After two years of near zero yields, the past few weeks have seen the re-emergence of yields over 2%. Below you can see what the rates of brokered CDs sold by Fidelity's looked like as I was writing this on March 7, 2022.   Fidelity - Certificates of DepositUnlike ETFs, whose prices can plummet along with the market, CDs are guaranteed to give you back your original investment at the end of their term. Yes, you lose to inflation, but so are the holders of ETFs whose share prices tank. And if inflation really gets going, the safest investment for those seeking income is a money market fund. It was only a few years ago, in 2018 that the Vanguard Prime Money Market Fund was paying over 2% and rising as other rates rose. In 1982 money market funds were paying 17% and were where a lot of us put our money because we knew that if rates rose even higher so would the yield on that fund.  If inflation drives rates up above 5% over the next five years and CD rates--or even money market funds start yielding more than dividend stocks, the prices of dividend stocks and dividend ETFs will have to drop significantly to provide a dividend yield that beats that rate and provides a premium to compensate for the risk investors take in buying volatile stocks that don't promise the return of the original investment.  At that point, the wisdom of buying stocks to profit from the growth of companies' earnings, with dividends being an added plus, will become clear again to investors. Investors who bought VOO will be glad they bought an ETF that provides some earnings growth along with its dividends.  This Is Not the Time to Make a Large, New Investment in VOO If you bought VOO more than two or three years ago, you are still sitting on magnificent gains. There is no reason to sell except perhaps to tax loss harvest more recent lots. If you invest a small amount every payday, keep doing it. But this is not the time to invest a large lump sum in VOO, like the proceeds from the sale of a business or a once-in-a lifetime inheritance. Because VOO is still suffering from the extreme surge in price that took place after COVID-19 hit and likely to see its price decline further, especially if inflationary pressures and world events cause company expected earnings to decline.  That is a real issue, because investors are often shown Forward P/E ratios to justify current prices. But the earnings forecasts that forward looking P/E ratios are being calculated probably haven't had time to catch up with the havoc caused to international commerce by the necessary responses other countries have had to make to Russia's criminal behavior which will amp up the intensity of inflation.  There is no point in investing for income in any ETF yielding in the low single digits if that ETF's share price is going to drop 10% or more--possibly much more. And that kind of market meltdown is something that becomes more likely with every passing day.  Fortunately, there are various techniques that can help us determine what would be a better entry point for investors thinking of investing in VOO.  When Would It Be Safe to Invest in VOO? Because VOO tracks the closely-followed S&P 500 we are given a bit more useful information in valuing it, information we just don't have access to for other ETFs. So while I do pay attention to the few metrics that providers of other ETFs give us and take a very hard look at the valuation of the heavier weighted stocks that make up other ETFs, as readers of my previous articles know, I feel that I'm on more solid ground when studying VOO. That is a major reason I am coming to prefer it as an investment. (The other is that it only holds profitable companies, which insulates it a bit from the worst excesses of speculative investors.)  I have taken several different approaches in my last few articles to estimating what would be safer entry points into VOO. One is to look at what P/E ratios prevailed in different kinds of markets over the past two decades. I then use that P/E ratio in combination with current earnings to come up with a price that would yield the P/E that makes more sense for current market conditions. That becomes more difficult when catastrophic events are making future corporate earnings far more difficult to predict and conditions deteriorate from week to week. But referring to past P/E ratios can still be informative. Since I last used this technique in my article VOO: Value-Based Price Targets for VOO Under Different Possible Scenarios, the final total amount of annual earnings for the S&P 500 index came in at $205.36 which was significantly higher than the $185.88 that analysts had estimated. However, analysts have also dramatically shrunk their estimates for 2022 and 2023's S&P 500 earnings. Instead of the 12% they were forecasting for 2022 just a month ago, they are now estimating this year's earnings growth at only 1%. Even that may be too optimistic.  Adhering to the logic I explained in that earlier article, I am keeping my eye on the following price levels, which produced the P/E ratios that prevailed in different market conditions in the past. I urge you to read that article to better understand how I arrived at these values. The table below, still presents the P/E ratios selected in that article, but has recalculated prices based on the S&P 500's higher actual 2021 earnings. I then derived VOO target prices based on the S&P 500 prices using the 0.0961 factor that gives a good approximation of their relationship. Be aware that as we move through 2022 and start to see actual earnings and new forecasts, these target prices will need to be updated.  VOO Price Targets For Different Market Scenarios  Data from Factset via Fastgraphs. Selection and calculations by the author.Since the market is currently not expecting healthy corporate earnings growth for this year, I am not rushing to invest at the current P/E ratio, though it meets the first target I had set for a healthy market. Instead, investors who are seeking safety and income would do best to hold off until either the market stabilizes for a month in response to declining inflation and an end to major international conflict or has reached a price that gives it a P/E somewhere around 17. I would still not put in large amounts, but continue to invest reasonable sums monthly so that if we do get another \"big one\" I still have the ability to profit from prices that produce single digit P/Es.  Investors who prefer investing on the dividend level will be better off if they start to invest in VOO when its dividend yield exceeds 2%. Not so coincidentally, this seems to happen when P/E levels reach the 17 range that my other technique suggests is safe.","kind":"news","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":9036686899,"gmtCreate":1647063191256,"gmtModify":1676534192801,"author":{"id":"4100762146155980","authorId":"4100762146155980","name":"blue sky","avatar":"https://static.tigerbbs.com/9b2e8df8c306b75fa66dfc367bc062ab","vip":1,"crmLevel":6,"crmLevelSwitch":1,"idStr":"4100762146155980","authorIdStr":"4100762146155980"},"htmlText":"What is the best price to buy?&nbsp;","listText":"What is the best price to buy?&nbsp;","text":"What is the best price to buy?","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":11,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9036686899","repostId":2218123187,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":6,"commentSize":1,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}