Why Do Dividend Investors Critique Dividends While Promoting ETFs? – A Dive into the Contradictions

The passive investing community can be pretty vocal on Reddit. Undoubtedly, there are numerous benefits of going down the ETF (Exchange-Traded Fund) route. It’s simple, cost-effective, efficient, and perhaps most important, a massive time saver for those who have little interest in going the extra mile to construct a portfolio of individual stocks with the goal of beating the returns of the market (the S&P 500). Indeed, it’s not easy to beat the stock market averages, at least consistently. For those who don’t think it’s possible to top the market returns or would rather take more of a hands-off approach, the indexing route just makes sense.

For those who want to have more of a personal touch, constructing a portfolio of various ETFs (both passive and active) can act as a nice middle ground for investors who strive to do a bit better than the market but would rather stick with baskets of stocks rather than individual names.

Dividend ETFs are great for new income investors. But there’s value in individual names as well!

For passive income investors looking to fund their retirement with dividends, an ETF focused on dividends and dividend growth offers a quick and easy solution. With the advent of covered call ETFs, which trade off upside potential for additional income, it’s now possible to achieve even higher yields without the same downside risks that come with picking individual, distressed dividend stocks that boast “accidentally” high yields as a result of a prior drop in the share price.

Though a strong argument could be made for the passive approach over the active stock picker’s approach, I believe there’s nothing wrong with incorporating both approaches so as long as you’re buying individual stocks for the right reasons (not chasing yield in value traps). If you’re heavily allocated to dividend ETFs and an individual stock on your radar strikes you as deeply undervalued with a swollen, but safe yield, I see no issue in complementing your ETF portfolio with individual names as well.

Chasing yield in individual names can be dangerous.

However, if you’re a new investor who’s just screening stocks for their yield while paying no attention to what the actual business does or the valuation of its shares, you may be adding too much risk to your portfolio. Arguably, sticking with dividend ETFs can prevent new investors from the pitfalls that stock pickers may fall into, most notably “yield chasing.” For beginners, sticking with ETFs can allow one instant diversification, a more secure distribution, and less time spent analyzing aspects of an individual business. Additionally, many new investors may get into stock selection for all the wrong reasons.

Trying to crush the market or get more yield can lead some to take on more risk than intended. However, for those who can stomach such risks and have the skillset to value a company, buying individual dividend stocks can be a good idea.

Given that some individuals are actively tracking down ultra-high-yielders with payouts that aren’t all too well-covered, I can see why ETF investors would be more critical of those who opt to pick and choose their own dividend stocks. At the end of the day, dividend cuts are a real risk faced by those who chase yield. For investment newcomers with an interest in picking their own stocks, perhaps gaining a helping hand from a financial advisor makes sense, so that they can call you out if you’re guilty of reaching too far for yield with an individual name.

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