US dividend ETF SCHD

Question

I am currently invested in the following and am divided as to what the next funds to add. Ideally, I would like to add more dividends ETF like SCHD as considering retirement in 10-15 years time. But having found out recently that dividends are calculated as part of tax even when on DRIP is giving me second thoughts. My next alternative would be to just add more into IVV as I seem to be under-invested currently.
 
- MOAT @ 34%
- IVV @ 14%
- A200 @ 17%
- PLTR @ 15%
- IBIT @ 20%

Answer

Hi Chrissy.

Given the ETFs you already have, there’s not a lot of advantage to adding more.

If you wanted more dividends, then keep in mind A200 actually pays pretty decent dividends and comes with franking credits as well.

But if you just wanted to pick another holding to top up, as you said IVV is the smallest one and it’s a very diversified holding in itself so that could make sense too.

If I’ve learned one thing it’s this: don’t overcomplicate the portfolio.  Keeping things simple makes a lot of sense for many reasons.

All the best.

Answer

When considering your investment strategy, especially with a focus on preparing for retirement in 10-15 years, it’s important to balance growth potential with income generation. Given your current portfolio distribution and your interest in dividend ETFs like SCHD, let’s explore your options.

Dividend ETFs and Tax Considerations: It’s true that dividends are taxed as income, even when reinvested through a Dividend Reinvestment Plan (DRP). However, the advantage of DRPs is the ability to compound your investments without incurring transaction fees, and often at a slight discount to the market price. This can be particularly beneficial in a long-term growth strategy, as reinvested dividends can significantly increase the number of shares you own over time, potentially leading to greater capital gains in the future.

Increasing Exposure to IVV: You mentioned feeling under-invested in IVV, which tracks the S&amp;P 500 and offers broad exposure to the U.S. equity market. Increasing your stake in IVV could be a wise decision for growth, especially as it diversifies your investments across many sectors and companies. This ETF is known for its low expense ratio and strong performance history, making it a staple in many long-term investment portfolios.

Balancing Your Portfolio: Currently, your portfolio is somewhat concentrated in specific areas (MOAT, PLTR, IBIT). While these investments might have specific strategic roles, broadening your exposure could reduce risk and increase potential returns. For instance, considering global or emerging market ETFs could diversify your investments further, potentially offering higher growth opportunities as global markets expand.

Considerations for Retirement Planning: Since you are considering retirement in the near future, it’s crucial to think about how your portfolio can provide both growth and income. While dividend ETFs like SCHD provide regular income, growth-oriented ETFs like IVV can significantly appreciate in value, providing a balance between immediate returns and future security.

Tax Planning: Given your concerns about the tax implications of dividends, it might be worthwhile to consult with a tax professional who can offer strategies to manage or potentially minimize your tax liability. This could include exploring different account types or other tax-efficient investment vehicles.

At Pearler, we see that a significant portion of our community invests in ETFs, with many opting to reinvest their dividends. This approach aligns with a long-term growth strategy, particularly for those planning for retirement. Reinvesting dividends through a DRP can be a powerful tool in wealth accumulation, despite the immediate tax implications. As you consider your next steps, think about how each addition to your portfolio fits with your overall investment goals and risk tolerance. Pearler’s platform can facilitate these adjustments smoothly, helping you to automate investments and reinvest dividends efficiently.

You can find out more about this topic here: Friends With Money

Disclaimer

I am an AI-powered chatbot and not a financial advisor. The information provided is for educational and informational purposes only and should not be considered as financial advice. Investing involves risks, and past performance is not indicative of future results. It is important to conduct thorough research and consider your own financial situation and risk tolerance before making any investment decisions. It is always recommended to consult with a qualified financial advisor or professional before making any investment decisions.

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DIVIDENDS AND TAX

Chrissy Lim.

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Dave Gow - Strong Money Australia

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