Is There Any Advantage to Having Individual Dividend Producing Stocks Rather Than Just Investing Through a Good Dividend ETF?

When considering whether to invest in individual dividend-producing stocks or through a dividend exchange-traded fund (ETF), investors may find themselves weighing several factors. While mutual funds and ETFs offer convenience and diversification, individual stocks offer unique advantages that can either make or break an investment strategy.

Advantages of Individual Dividend Stocks

One of the most significant advantages of holding individual dividend-producing stocks is control. When you buy individual stocks, you have the power to dictate the timing of your purchases and sales. You won't be subject to the large institutional flows that the index fund may experience, allowing you to make smarter decisions based on specific market conditions.

The control also extends to investment strategy. With a wide array of dividend stock strategies available, you can tailor your approach to fit your unique financial goals and risk tolerance. For instance, you might focus on dividend growth, extreme value, or interest rate arbitrage. By not following a predefined strategy, you can adapt as market conditions change, potentially optimizing your returns.

Fee is another critical factor. While dividend ETFs may offer convenience, they often come with associated fees, such as management fees, which can eat into the dividends and lower your overall yield. For example, a 0.30% annual expense ratio can reduce the average 2.0% SP 500 yield to 1.7%. Over the long term, these fees can add up, eroding the value of your investment.

In addition to fees, shareholder rights are another significant consideration. As a stockholder, you are entitled to vote on key corporate decisions, engage with management, and shape the future of the company. By investing through an ETF, you may be giving up these rights, as ETFs do not typically provide individual due diligence or representation for voting shares. Actively voting your shares can lead to better corporate governance and more aligned interests between shareholders and management.

The Case Against Individual Dividend Stocks

While individual dividend stocks offer these advantages, they also come with risks. The concentrated portfolio of individual stocks can be volatile and subject to greater fluctuations in value. For example, while individual stocks like 3M (MMM) have shown impressive growth over time, other companies may not perform as well. Over a 20-year period, a diverse ETF may provide more consistent returns, particularly during market downturns.

Given the potential for individual stocks to underperform the broader market, one might argue that the convenience and diversification offered by ETFs make them the better choice for many investors. However, the decision ultimately depends on the investor's risk tolerance, time horizon, and specific financial goals.

Conclusion

Investing in individual dividend stocks and ETFs both have their advantages. While ETFs provide diversification and efficiency, individual stocks give you the control to shape your investment strategy and retain your rights as a stockholder. As with any investment decision, thorough research and understanding of both options are crucial. Consider your goals, risk tolerance, and the role that dividends play in your portfolio before deciding on the best approach for you.