Comparing US index and dividend investing
Conclusion: Investing index funds are the best.
In this post, I aim to compare the performance of dividend investing and investing in US indices (US index ETFs) over the same period. Additionally, I’ll compare the average annual growth rates of US real estate and Seoul apartments to determine which investment strategy is more competitive.
As previously shared, I allocate half of my retirement account to the S&P 500 and half to the Nasdaq. As many of you already know, investing in US indices is the best choice for retirement and long-term investments. Additionally, I mix in the Nasdaq to maximize returns. Since retirement is still 30 years away, I can afford to ignore the volatility of the Nasdaq.
Advantages of Dividend Investing:
However, dividend investing has gained attention in recent years. Investing in US dividends allows for receiving dividends in dollars, enabling foreign asset holdings, and monthly dividend products can generate monthly cash flow. When I asked ChatGPT about the benefits of dividend investing, it provided the following list:
- Regular Income: Dividend-paying stocks provide regular cash flow to investors at regular intervals, helping cover living expenses and other costs.
- Stable Returns: Some large companies generate stable and predictable profits over several years, making dividends stable. This protects investors from unexpected volatility.
- Suitable for Long-Term Investment: Dividend stocks are suitable for long-term investment strategies. Over the long term, both stock prices and dividend income can increase together.
- Mitigation of Stock Market Volatility: In addition to expectations of company growth, dividends provide income. This makes dividend stocks relatively insensitive to market volatility.
- Signal of Company Health: Dividend payments can indicate a company’s healthy financial status and stability. Companies that pay dividends often have stable cash flows and capital structures.
- Reinvestment Opportunities: While dividends can be received in cash, they can also be reinvested in the corresponding stocks. This allows for compounding effects.
Despite these advantages, I have been hesitant about dividend investing. My reasoning is as follows: Firstly, as I concluded in a previous post that I won’t be investing in bonds for a while. I thought that now is the time to expose myself to as much risk as possible in my investments. This doesn’t mean that dividend investing is wrong, but I believe that for investors in their 20s and 30s, it’s better to invest as much principal as possible in stock assets exposed to the market to maximize compound interest. Ironically, over a period of more than 10 years, stocks have the lowest risk. As with bonds, I plan to gradually shift a significant portion of my existing assets to dividend stocks or bonds to align with my retirement age. Secondly, dividends are subject to immediate dividend income tax. The most important factors in pension investment are time and tax deferment. If you pay a 15.4% income tax on dividends every year, that money won’t work, and as time accumulates, the gap will grow much larger. Now I want to simulate the performance of each investment.
Comparison of Dividend Stocks vs. US Index Investment Performance:
I used the Portfolio Visualizer, as introduced in the previous post (reference link below), for performance comparison. I conducted backtesting with investment periods and products. Although I wanted to test for a longer investment period, the oldest dividend ETF I found was SDY (SPDR S&P Dividend ETF) launched in ’06, so I set the period from ’06 to ’23 (a total of 18 years). The investment capital is $10,000, using the Buy-Hold method, and dividends were reinvested automatically.
Investment Conditions Summary:
| Ticker | Period | Principle | Dividend Reinvested | *Recent dividend yield | Remark |
| SPDR S&P Dividend ETF (SDY) | 2006-2023 | $10,000 | O | 2.64% | |
| SPDR S&P 500 ETF Trust (SPY) | O | 1.40% | |||
| Invesco QQQ Trust Series 1 (QQQ) | O | 0.62% |
* Dividend yields may vary within the simulation period
Performance Comparison
| Ticker | Principle | Appraised (norminal) | Appraised (inflation adjusted) | CAGR (norminal) | CAGR (inflation adjusted) | Standard Deviation | Best Year | Worst Year |
| SDY | $10,000 | $44,931 | $28,827 | 8.7% | 6.1% | 15.2% | 30.1% | -22.8% |
| SPY | $10,000 | $54,001 | $34,645 | 9.8% | 7.2% | 15.5% | 32.3% | -36.8% |
| QQQ | $10,000 | $117,119 | $75,140 | 14.7% | 11.9% | 18.7% | 54.9% | -41.7% |
As expected, the performance of index investing is superior. Cumulative returns for each ETF based on inflation-adjusted standards are 288%, 346%, and 1,171%, respectively. I found that the standard deviation for SPY is similar to that of the dividend ETFs, likely because of the long-term nature of the investment. In the market, it seems that companies that generate grwoths receive a higher premium than those that only distribute dividends. As mentioned above, the results are based on the Buy-Hold method. When investing monthly, like in a pension, the gap may be smaller than the table above. Based on past data, I personally think that long-term investment in general indices and growth stocks is better than dividend investing. (Of course, past performance does not guarantee future performance.) Of course, dividends have the significant advantage of providing stable cash flow, so it may be a good idea to decide based on individual preferences and investment cycles.
Comparison of Real Estate vs. US Index Investment Performance:
I was also curious about the results compared to real estate investment. I selected real estate markets such as Seoul apartments and the US housing market and sought data for the past 20-30 years to compare average annual returns and standard deviations. Below are the results found through news searches and Googling.
| Type | Period | CAGR (inflation adjusted) | Standard Deviation | Source |
| Seoul Apartment | 2006-2021 3Q | 4.0% | 9.6% | Jungang Daily (w/ Bank of Korea) |
| US Housing Market | 1991-2019 | 3.7% | 5.4% | MDPI |
| S&P 500 | 8.2% | 18.1% | ||
| NASDAQ | 12.6% | 27.9% |
The characteristics of the real estate and stock markets are clear. In terms of returns, the stock market is overwhelming, but the volatility is high. However, I think that the volatility can be offset when investing for the long term.
I think that from a long-term investment perspective, stock assets are more advantageous. 1) The returns are the highest, 2) cashing out is easier, 3) you can generate cash flow by selling only a portion, and 4) even after selling, you can continue to earn compound interest. Although real estate is undoubtedly more advantageous for making big money, it is similar to timing trading and leverage use, and if the timing is right, it would be great, but if you make a mistake even once, you may be in a situation where you have to wait for several years to decades. The purpose of pension investment is retirement preparation. Retirement preparation aims to create stable cash flow. In that case, it would be more comfortable to bet on the side proven by past data.
To further explain the “4) even after selling, you can continue to earn compound interest,” let’s assume that we start preparing for a private pension at the age of 25 and continue to contribute a fixed amount every month until we are 55. In that case, I think that the average unit price of the invested assets would be the price invested around the age of 40. And if I retire at 60, I will start withdrawing based on the average unit price invested 20 years ago. The withdrawal amount will be determined based on the profits earned over the past 20 years, and if I start withdrawing at 70 with a little more room, I can use the pension for 30 years based on the profits earned from the investment over the past 30 years. So starting pension investment as soon as possible is crucial, and if possible, it would be best to invest as much money as possible when young, as the average unit price would be lower (or higher). A common way to generate cash flow after retirement is to invest in real estate such as stores around the time of retirement to earn rental income or invest in dividend stocks. Although it can provide a stable cash flow, starting before or after retirement may result in a lower efficiency compared to starting early. Of course, I’ll leave out large real estate sizes. Comparing US index and dividend investing.