In a recent series of articles, I examined the revenue stream from a balanced portfolio of two dividend ETFs, Vanguard's (NYSEARCA:VIG) and (NYSEARCA:VYM) combined with two bond ETFs, the broad based (NYSEARCA:AGG) and the corporate ETF (NYSEARCA:LQD). I examined that portfolio mix in the drawdown phase in this article here and I then examined the portfolio income in the accumulation phase in this article here.
After I posted a subsequent article a (mysterious) reader commented that I had an error in my numbers. I had come to believe after viewing a few sites including Yahoo and dividata, that VIG and VYM eliminated their dividend in June of 2009. That seemed to makes sense given that year was the height of the market meltdown, many companies were cutting, freezing or eliminating their dividends. You can see and read more on that in my article, Dividend Growth Investors Prepare for the Correction. Some 37% of dividend champions cut, froze or eliminated their dividend in 2009. What's more there can be complications when investing with the crowd as many run for the hills in a market meltdown, demanding their money at a loss. That can force a fund manager's hand, even to the point that they may need to sell assets in addition to using all of the dividends to pay out those investors who did not have the risk tolerance to be invested in a stock fund.
But the cuts did not happen. I emailed Vanguard and they confirmed that both VIG and VYM paid a dividend in June of 2009. VYM paid .26 and VIG paid .23. That was great news. I am not sure if that perceived dividend cut was one of the reasons that stock pickers thought that ETFs do not work for sustained dividend growth. It may have factored into the equation. It certainly made me more uncomfortable investing in the communal ETF pool. I personally have patience. I was an all equity investor through the meltdown, and hung on and also bought some more when everyone was fearful. I do not want to be penalized for hanging with those who don't know their risk tolerance level, and only find out when they are truly tested. So if the ETFs could hold up during the greatest correction since the great depression, perhaps they'll hold up again in the next correction, whenever that may come.
So how does this happen, that so many sites get it wrong? Well as you might guess, many of them pull data from the same sight such as Yahoo. The initial source of the error may be also be a service such as tickertech.com, a company that provides input data to other online resources that track portfolio performance. Once one site has it wrong it becomes a chain reaction. After talking to the owner of low-risk-investing.com he stated that errors are common and many in the financial tracking world.
On the right side of the ledger kudos to Google finance who 'got it right'.
How does that affect Vanguard results?
So how did those missed dividend payments affect my income and returns evaluation? Not very much in the grand scheme of income and income growth. The two payments would total about $107 with each ETF starting with $10,000 each. And perhaps it would add .5% in total return. But it does make a difference in the dividend growth (or decline) numbers from 2008 through 2010.
Here are the original growth rates with dividend reinvestment, with dividend elimination in June of 2009. The two ETFs are based on a $10,000 investment, in each.
Equal Reinvestment to Stocks and Bonds.
Start Date of January 2007.
We can see that the quarterly dividend elimination distorted the numbers for 2009, providing a drastic loss of income, and also a false and low base amount for 2009 delivering some extreme dividend growth from 2009 to 2010.
And here are the adjusted numbers with the addition of the dividend payments in June of 2009.
Equal Reinvestment to Stocks and Bonds, Total Portfolio.
Start Date of January 2007.
And here's a look at the income of the two Dividend ETFs in isolation. Start Date of January 2007.
The dividend growth rates and declines are certainly more 'normalized'. And in this article entitled Dividend Growth Showdown: It's ETFs vs the Stock Pickers, I compared the income stream from combined VIG and VYM to the public portfolio of popular Seeking Alpha author David Van Knapp. We now have a very fair start point with the total dividends paid in 2009 for the DVK and Vanguard Portfolios.
Dividend Growth Rates: The Vanguards vs DVK.
Vanguard 4-year Compound Annual Growth Rate - 12.48%
DVK Portfolio 4-year Compound Annual Growth Rate - 13.32%
In David vs the Goliath's of the Dividend ETF world, it's a slight advantage to DVK's portfolio based on David's and my own projections for the final quarter dividend payments of 2013. I will update this comparison in January with the actual dividend payments received.
On total return it might not be a big deal. That extra $107 in dividend payments might have added an extra $160-$170 in total return from 2009 to present. That might add .5% to the total return over that period. But I did check in with low-risk-investing and that site does draw data from Yahoo. So the total return numbers listed in the articles were low. And having learned my lesson, I wanted to eyeball the total return numbers and compare to other sites. It appears that the total return numbers for VIG and VYM at various sites may be well under represented. I checked at buyupside.com, a site that does calculations with dividend reinvestment for stocks and ETFs. Here's what buy upside had to say starting in June 30 of 2008, the comparison to DVK start date. Numbers above what I had posted.
Not only that, buyupside also uses Yahoo and would be missing that one dividend payment in June of 2009.
And checking with Vanguard they have some very nice total return numbers in their total return chart, with hypothetical returns on a $10,000 investment. Here's that chart and an approximation of June 2008 - the start date of portfolio comparison. Recently that investment moved above $16,000, suggesting returns for VIG from June of 2008 are closer nothing short of incredible over that period.
If we look at the unit prices for VIG we have an opening price of 50.03 for June 30 of 2008, and a closing price of 72.48. Once again, that site (buyupside) did not get the unit prices correct, and would not offer October 31 as an end date. That said, if we go by Vanguard's unit prices we have a 45% total return based on capital appreciation alone, without dividends and reinvestment. VIG also made 21 quarterly dividend payments. How much did those payments add to the 45% total return number? I will check in with Vanguard and "others" and get back to you.
What's up with the numbers?
My personal conclusion is that the numbers we may all use will likely have errors here and there. We can be diligent, but it will likely be impossible to be perfect.
As famous Toronto Blue Jay pitcher Dave Stieb wrote in search of a no-hitter... "Tomorrow I'll Be Perfect".
Stieb had no-hitters broken up with two outs and two strikes in the bottom of the ninth inning in two consecutive 1988 starts. Stieb eventually got his no-hitter. There's hope.
Next up in the comparison series, the actual income generated by the Vanguard and DVK portfolios, and a comparison between the two Vanguard ETFs. Also on my balanced income portfolio exploration - the Cranky Maneuver. That is, redirecting all portfolio income to the dividend growth side.
Disclosure: I am long VYM, DIA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Dale Roberts aka cranky is a Streetwise Coach at ING Direct Mutual Funds. The Streetwise Portfolios offer index-based complete portfolios to Canadians. Dale’s commentary does not constitute investment advice. The opinions and information should only be factored into an investor's overall opinion forming process.