Summary
Some investors require that their portfolio holdings provide periodic payments, aka income.
While these investors may avoid QQQ due to lacking dividends, income concerns need not constrain their investing choices.
Rather than going dividend-shopping, these investors should seek the best risk-adjusted return and then specify their own payment policies.
Ghing/iStock via Getty Images That different investors have different needs is a fact that sometimes gets sidestepped in finance. Those requiring some income from their portfolios first get labeled as “dividend investors” and then get corralled into a small subset of choices satisfying that one specific requirement. Given that most firms’ dividends could change at any time, investors with income needs should consider taking control of the situation.
Examined herein is a 15-year investment in the Nasdaq-100 (NASDAQ: NDX ) through Invesco QQQ Trust (NASDAQ: QQQ ) with an annual payment equal to 5% of the original investment (adjusted for inflation). Even with the Financial Crisis early on, the investment’s principal grew at a rate of 11.1% per year net of all payments. Self-Issued Dividend
Paying yourself a dividend is straightforward: sell shares which have a total value equal to the specified amount. The Net Asset Value (NAV) of your investment will be reduced by the amount of the self-issued dividend. This is exactly the same result as with a firm-issued dividend. The following chart summarizes a few relevant details. Dividend Effects Firm-Issued Self-Issued NAV Reduced by dividend amount Reduced by dividend amount Share Number Same Reduced Share Price Reduced Same An investor with 100 shares of stock priced at $50 has an NAV of $5000. A firm-issued dividend of 1% results in an NAV of $4950 (100 shares priced at $49.50). A self-issued dividend of 1% results in an NAV of $4950 (99 shares priced at $50).
The idea behind a self-issued dividend? Investors should realize that for most firms dividends are nothing more than a financing policy. Investors should consider a stock on its own merits and then customize the income derived from it. If a firm is a good investment but pays low dividends, its growth prospects will be enough to pay for the annual payments considered here. Methodology
Assuming an initial holding of 3000 QQQ shares at the end of 2005 (about $120,000), this strategy returns 5% of the initial investment by the end of each year over the course of 15 years. This income is comprised of firm-issued quarterly dividends and a self-issued disbursal funded by a stock sale at year’s end. The number of shares sold is rounded to the nearest whole number.
The 5% return (initially about $6000/year or $500/month) on the investment is scaled each year by the Consumer Price Index for All Urban Consumers: All Items in U.S. City Average ( CPIAUCSL ) retrieved from FRED. The QQQ data is from Yahoo Finance, and for those who like to verify data, there are some errors in the QQQ dividend download. Per the distribution record on Invesco’s site , two entries were deleted (June 25, 2010 and Dec 27, 2011) and one was added (Sept 21, 2020). Growth or Dividends? Yes
The annual income from this investment ranges from $6000 to $8000 over the course of 15 years. The red bars in this figure show the dividends paid by NDX firms each year. The blue bars show the proceeds from shares sold at the end of the year to make up the difference between the 5% payment and the diminutive dividends common to NDX firms. Has the Well Run Dry?
A concern some will express regarding such a strategy is that one will run out of shares eventually. Shown below is the number of shares over the course of 15 years, a period including the Great Recession. The strategy currently holds 1822 shares, just over 60% of the original portfolio. The tapering off of the shares held and sold in the figure is due to the fact that the value of QQQ is outpacing CPI.
Serious investors know there are things much more important than the number of shares. Is an investment able to grow net of its yield? After providing a 5% yield on the initial investment (adjusted for inflation), what is the NAV of this strategy?
The figure below shows the portfolio value from the end of 2005 through October 2021, or 15 years 10 months. The principal grew from $121,230 to $703,495. This is a growth rate of 11.1% per year after paying out $6000 to $8000 income annually. If one had collected […]
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