When it comes to investing, it's tempting to chase after the highest dividend yields, but there are moments when sacrificing a portion of that yield for higher-quality investments can prove to be a wiser and more rewarding strategy. This blog will explore the concept of giving up some dividend yield in favor of quality and use two exemplary ETFs, FGQI (Fidelity Global Quality Income UCITS ETF) and TDIV (VanEck Morningstar Developed Markets Dividend Leaders UCITS ETF), to illustrate the benefits of this approach. As a disclaimer I don't regard TDIV necessarily as a bad investment, however, currently, it doesn't fit my goal or vision and could be interesting further along the line. I have written my review of these 2 ETFs separately in more detail in FGQI review and TDIV review.
The Dilemma: Yield vs. Quality
The investment world presents a constant trade-off between chasing high-yield assets and opting for quality. While higher yields can be enticing, it's essential to consider the trade-offs and risks that often come with them.
FGQI - Prioritizing Quality for Consistency
Let's first look at FGQI, the Fidelity Global Quality Income UCITS ETF. FGQI is focused on global equities and aims to capture income through dividend payments from high-quality companies. While its dividend yield may not be the highest, it places a significant emphasis on the quality of its underlying assets.
FGQI is essentially building a portfolio around companies with robust financials, consistent profitability, and a history of reliable dividend payments. By sacrificing a portion of the potential dividend yield, one can gain the reassurance of stability and sustainability provided by these quality investments. FGQI's approach is particularly attractive to me for seeking dependable income and long-term growth while managing risk.
TDIV - Chasing Yield at a Cost
Now, let's examine TDIV, the VanEck Morningstar Developed Markets Dividend Leaders UCITS ETF. TDIV pays a high dividend of approximately 5% vs FGQI's 3%, which is indeed appealing to income-focused investors. However, it's essential to consider the trade-offs and performance in light of this attractive yield.
Over the past five years, TDIV has underperformed FGQI, even when considering the reinvestment of dividends. TDIV has delivered a return of 53%, while FGQI has outperformed it with a return of 58%. This underperformance underscores the notion that the pursuit of high-yield assets can sometimes come at a cost, even though it is a small difference it is something to note.
Furthermore, TDIV carries in my opinion more risk due to its sector allocation. Approximately 33% of its allocation is in financials. This heavy weighting towards a single sector introduces more risk and seasonality to the investment. The financial sector can be highly sensitive to economic and market fluctuations, potentially impacting TDIV's performance. I don't like having such a big percentage allocated to the financial sector and is one of the main reasons I stay away from this ETF for now.
Prioritizing Quality: A Smarter Approach
I recognize that the pursuit of high dividend yields doesn't always result in the best overall returns. Sacrificing a portion of yield for higher quality investments can provide stability, reduce risk, and potentially lead to better long-term performance.
In conclusion, while the appeal of high-yield investments is undeniable, sacrificing dividend yield for quality investments can be a more prudent and sustainable strategy. FGQI and TDIV serve as prime examples, highlighting the importance of quality in an investment portfolio. Prioritizing quality can lead to a more balanced and secure investment approach, which is often the key to long-term success.
Disclaimer: I am not a financial advisor, this blog is centered around my opinion and should not be viewed as legal, professional, or financial advice.
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