Cherished Readers, I have come to an uneasy decision and I’m not sure if I’m right.
I used to buy units in the XDV exchange traded fund (ETF) issued by iShares. When Vanguard came to Canada, I stopped buying units in XDV and started buying units in VDY. Why did I make the switch? Both ETFs satisfied my desire to build my army of money soldiers by making regular monthly purchases through my brokerage account. However, the MER for VDY was 0.22% while the MER for XDV was 0.55%. I listened to the wisdom of the Internet and decided that I should only pay the lower MER for essentially the same product.
Except….
It’s been two years since I started buying units in VDY. The monthly dividend payment per unit varies wildly, and I haven’t been able to figure out why. Both the VDY and the XDV are Canadian-based dividend products, which means that there is a great deal of overlap between their holdings. Yet, my XDV dividend payment is relatively consistent from one month to the next. The VDY dividend payment varies wildly – one month, it’s $0.13/unit and the next month it’s $0.05/unit. On the flip side, the XDV dividend payment is relatively consistent from month to month. It may be $0.087/unit for three months, then fall to $0.078/unit for a few months, before going back up again. There are never wild gyrations from one month to the next, so my monthly dividend cheque stays roughly the same or increases a little bit due to the acquisition of new units via my dividend re-investment plan (DRIP).
Given that one of my goals is to be able to live off my dividend payments, I prefer some reliability in the amount of money that I’ll be getting from one month to the next.
So my uneasy decision is this. Starting with my next contribution, I will go back to buying units in XDV even though it will mean paying an extra 0.33% in MERs to do so. I spent a little time with my calculator on a recent trip out of town and I figured out that if I had stuck to buying units in XDV over the past two years, instead of switching to VDY, I would be earning an extra $300 per month in dividends on top of what I’m earning now. That’s not enough to live on, but it certainly would be enough to buy a month’s worth of groceries for this Singleton.
So my question remains – is the higher MER worth it? The more dividends I earn each month, the faster they can compound through my DRIP, and the sooner I can reach my target of earning atleast $2000/month in dividends by the time I retire.
Is it really so bad to spend an extra 0.33% in MERs if doing so allows me to meet my goals on the timeline that I’ve set for myself?
***************************
Cherished Readers, I have changed my mind. This is allowed because a wrong decision should be corrected as soon as possible in order to mitigate any negative consequences. I will continue to buy my VDY units at Vanguard even though the monthly dividend payment will most likely continue to fluctuate wildly. I calculated the average monthly dividend payment per unit of both investment products and realized that the average VDY payment per unit is higher. It’s the best of both worlds – a lower MER and a higher average monthly dividend payment per unit.
There’s nothing I can do about the fluctuations – that’s utterly out of my control. However, I can continue to purchase units in VDY each month. Eventually, I will have just as many units in VDY as I do in XDV. At that point, my regularly anticipated amount of monthly dividends will be higher – barring any dividend cuts from the underlying companies – and the fluctuations won’t have as much impact on my monthly budget.
For all of my reading and learning about personal finance and financial products over the years, I’ve yet to find a single article that explains the ins-and-outs of how funds distribute their money. I can appreciate that payments are going to be different where the underlying assets comprising the ETFs (or index funds and mutual funds) are quite diverse. In my case, the underlying assets comprising my two ETFs – VDY and XDV – are almost identical. So how come their monthly dividend payments vary so damn much?