I am thinking about shifting the investments in my taxable account from individual stocks to dividend ETFs.
The original plan for this account was to buy enough shares in individual stocks such that each dividend payout would be enough to buy an entire share. I needed to have enough to get a better commission rate, and I wanted to have some diversification. That meant I could only get about a dozen stocks, and spend $5,000 or so on each. There are not many stocks that fit the criteria.
There are some disadvantages to using dividend ETFs. There might be some overlap in my holdings. They only rebalance a few times a year, so they might hold a stock after it cuts its dividend. They are passive, so they will not sell a stock even though there are signs the dividend might be cut. They might also invest in stocks that I would not touch with a ten-foot pole. One of the ETFs I am looking at has shares in IBM. It’s only about 2% of the stock, but as far as I am concerned, anything more than no IBM is too much. Whenever I read an article stating that buybacks are bad (which they are) and profiling companies that make all or most of their money from financial engineering versus their nominal function, IBM is usually mentioned. It used to mean “International Business Machines”. Now it seems to mean “Incompetent Banking Manipulation”.
There are disadvantages for me for making this change. It would result in a lot of churning, which is bad. The point of dividend growth investing is to buy and hold for as long as possible, preferably forever. I would have to sell the stocks I bought in my taxable account, and in some cases buy the same stocks that I sold in my IRA.
There are some advantages to dividend ETFs. They can give people diversification that otherwise would be out of reach. It takes a hundred (or several hundred) shares of a stock to get a payout that will buy an entire share.
But the advantage might be to reduce long-term churn. There have been a few events that have caused me to reconsider the goal of this account. Duke is buying Piedmont Natural Gas. Norfolk Southern is fending off a merger offer from Canadian Pacific, and Berkshire Hathaway’s BNSF might look into buying another rail company. Baxter split. Verizon said it’s open to the possibility of buying Yahoo (that was a real WTHBTU? announcement). And the big deal is that Dow Chemical will merge with DuPont, and then they will split into three companies.
I want this account to be simpler. I will have to pay taxes on holdings in this account every year. If companies are buying and selling to each other, that will make my life more complicated. I am not a lawyer or an accountant, but I think that an ETF will shield me from some of that complexity.
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