How To Transform Your Dividend Portfolio Into An ETF Portfolio

By: ispeculatornew
Date posted: 02.24.2012 (5:00 am) | Write a Comment  (7 Comments)

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This is a guest post from BuildYourETFPortfolio.com, a website dedicated to helping investors manage their own retirement and other portfolios by buying and holding ETF’s….

Dividend investing is not only a great way to accumulate money but it’s also something that is fun to do, at least it is for me. I and many others that I know have started building a dividend portfolio and I personally feel like this could go on for a very long time. Why? Because even when I retire, I still expect to be more than capable of spending a few hours every month to look over my portfolio, reinvest any new amounts but also make any necessary changes to my existing positions.

I Won’t Go On Forever Though

As much as I’d like to pretend like I will be dividend investing, playing golf and running half-marathons for the next 50 years, chances are that it will not happen. Someday, I will unfortunately start to lose some mental and physical capability, I might even start to lose interest. Hopefully that won’t be the case but life can change so quickly that I think it’s much more prudent to be prepared.

Have An Alternative Plan

If tomorrow morning, you became unable or unwilling to manage your dividend portfolio, what would happen to it? If you picked some great stocks with an approach focused on dividend growth, chances are that you’d be fine and collecting nice dividends every month. After some time though, you might start having some “dogs” in your portfolio. Those would likely increase over time.

I personally think that building an ETF portfolio is a great alternative for when that time arrives. Why?

-An ETF portfolio is much easier to manage (could spend at most 1 hour per month)
-Fees remain very reasonable
-You remain in control of your finances
-Etc (for a full list of ETF portfolio benefits, visit BuildYourETFPortfolio)

The point is that you can easily build an ETF portfolio that will have great diversification with only 5-10 ETF’s. Those will likely have hundreds of different holdings which will give you solid diversification. We did build quite a few smaple ETF portfolios but once that you might be very interested in would be an “income focused ETF portfolio” that could include:

-Dividend focused ETF’s
-Fixed income ETF’s
-REIT ETF’s
-etf

Depending on where you live (Canada, US or elsewhere), the composition of your portfolio might change slightly but the main point is that you could simply try to stay as close as possible to your target weights by doing a handful of trades every year and would be achieving a return comparable to what you currently have with a dividend portfolio.

Downsides

Of course, I will not stand here and pretend that there are only benefits. If there were, what would be the point of even building a dividend portfolio? The two main ones in my opinion are:

Costs: Even if ETF’s are much cheaper than other managed alternatives, they still set you back 0.40% or so every year, which compounds and does become significant over time. It’s an incredible bargain when compared with mutual funds for example but still adds up if you compare to a dividend portfolio that does not incur such fees (there are more trading costs though).

Less Control: While there are many specialized ETF’s, nothing beats the power of buying exactly the stocks that you believe in, and avoiding those that you don’t. Obviously, that is not something you can do with ETF’s and often you might not even know what exactly the ETF holds. I would still argue that in the end, you will be able to find an ETF and/or combo of ETF’s that will make the portfolio representative of what you’re looking for.

Transition

I think one important part about moving from a dividend portfolio to an ETF portfolio is to ideally go through a transition period. You can subscribe to the BuildYourETFPortfolio mailing list to get a step-by-step series of emails that explains how to actually get it done. It’s easier to take time to get familiar with the asset classes, ETF’s, sample ETF portfolios, etc. To start off, I would simply start by reinvesting any income and new contributions into ETF’s and as time goes by and you feel more comfortable, you can transition over more of those assets over. Having a combination of ETF’s and dividend holdings can make a very strong long term portfolio so any investor can start off there.

In the End

I think it’s important for all dividend investors to stat considering adding ETF’s to their holdings sooner than later as they can both add a lot of benefits and become a much easier portfolio to manage, especially as we become older. What are your thoughts on this?

Do you hold any ETF’s?

Do you have any plans regarding the longer term direction of your dividend portfolio? I would love to hear from you.

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7 Comments

  1. Comment by Bernie — February 24, 2012 @ 9:12 am

    I invest mainly for dividend growth. I think the major downside of moving dividend stocks to dividend ETF’s would be losing the income growth element. Dividend ETF companies do a very poor job of increasing distributions.

  2. Comment by IS — February 24, 2012 @ 12:27 pm

    @Bernie – Thanks for the comment, what do you plan to do later on when unable to keep up your dividend investing strategy?

  3. Comment by vito — February 25, 2012 @ 3:18 am

    Is there some content I missed in this post, or is it a flat advertising for another website?

  4. Comment by Bernie — February 25, 2012 @ 11:50 am

    IS – At that point I plan to let them ride and live on the distributions, rather than re-invest them. My portfolio generates far more income than an equal amount ETF strategy would. The dividend growth element should take care of inflation so I wouldn’t have to sell off any stock.

  5. Comment by IS — March 6, 2012 @ 7:32 pm

    @vito – it’s actually a smaller website built by my partner and I

    @Bernie – agreed, but do you think just “leaving a dividend portfolio alone” for a few months/years can work over the long term?

  6. Comment by Steven J Fromm — March 30, 2013 @ 12:06 pm

    I have thought about getting involved in ETFs by transitioning from no-load mutual funds. However, the chore seems very daunting and I have a comfort level with my mutual fund portfolio. So I have been reluctant to pull the trigger on this change of strategy a my funds have done quite well over time.

  7. Comment by IS — April 1, 2013 @ 1:31 pm

    @Steven, I certainly understand that but it’s possible to do steps over time, move your money slowly as you get more comfortable with ETF’s…which makes it much easier.

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