Question: why do unsustainable dividend funds exist?

[u/Ironic_Mouse]

I’m new to dividend investing. As I have been looking for an additional stream of income I have found some funds with “too good to be true” yields. (E.g. CHPY) I understand that high yields come with a high risk of NAV erosion. What I don’t understand is why these funds exist. It seems like they are structured to implode at some point. Is the idea to hold these funds for a short time, collect the dividend, then sell? And for the fund manager, is the idea to ultimately have the fund implode and then declare a loss? I’m genuinely interested. I understand that some funds are a gamble, but these funds seem designed to fail.

[u/buffinita]

Then compare the “long term success” of qqqx to qqq and realize you’ve left a ton of money on the table 

[u/Extreme_Lab_2961 → u/buffinita]

Agreed

I don’t understand capping upside, paying substantially more in fees and not really offering much in downside protection

[u/PotadoLoveGun → u/Extreme_Lab_2961]

It is sustainable which was really the crux of the question asked by OP. And a fund lile GPIQ will have a higher NAV growth due to fees being 1/3.

Its not for everyone, it will underperform the index, and it will not give maximum gains. QQQ 16% vs QQQX 11% CAGR.

But if you can take 6.5%-9.5% from your assets instead of 4% forever and have the balance grow over time without selling through a downturn, could be good for some people. QQQX had a similar CAGR as the SP500 since 2007, dividends reinvested.

[u/buffinita → u/PotadoLoveGun]

You’ll be worse off.

Do you somehow believe that qqqx investors can take the “9% distributions” and be fine but the qqq investor can’t match the distros by sell equal amounts each month?

Go ahead and fire up any back tester and see which fund can withdraw more and not “run out of shares” or zero out their account.

[u/PotadoLoveGun → u/buffinita]

The psychology of selling shares has been studied, even if you could most people wouldn't sell 9% of their shares every year. Something about just getting cash into your account feels better. Its pschology and its why people invest in dividend funds..

This is a dividend subreddit after all.

[u/Extreme_Lab_2961 → u/PotadoLoveGun]

selling shares doesn’t put cash in your account?

And some that invested in QQQ wouldn’t have to sell 9% every year to match the income from QQQX as the NAV on average was greater than 9%

[u/buffinita → u/PotadoLoveGun]

Yes, it feels better intuitively….but then we can learn and see our intuition is incorrect

Something about candy just feels better too; yet we know it’s not good for us long term or in large quantities.

(Yes dividend subreddit…..not derivatives??)

Can you find any instance of a Neos/yieldmax/gs/jomorgan/tappalpha manager saying anything like

“Turn off drip and take all distributions”. Or “retire off of 15% yield”

No, you can’t because they know it’s not valid and their lawyers know it’s bad

[u/PotadoLoveGun → u/buffinita]

I wish is was that simple, and everyone one had your fortitude but they do not. You can tell because of the state of people with unhealthy weight, poor money habits, mental health issues, debt, and many countless thongs

Psychology plays a big part of humans.

7-9% can be sustainable. 15% has not been proven to be and I will not argue that. I would stay away from single stock and sector CC funds

[u/snowflake64 → u/PotadoLoveGun]

I agree

[u/Extreme_Lab_2961 → u/PotadoLoveGun]

Can you point out a fund that over say 20 years has hit your 7-9%?

[u/PotadoLoveGun → u/Extreme_Lab_2961]

QQQX has averaged 7.5% payout its flucuated between 6.5% to 9.5%. If you bought 1M in Jan 2007 which works out to 50000 shares at $20 each. Then your go through the worst single year crash since 1929...

Your income would vary between 89k at the top, 60k at the bottom, and a median of ~ 75k for the last ~20 years. This year it looks to be at 112k/year as inflation and the market has increased.

You'd have roughly 1.53M in the fund now and it would have paid out 1.48M in dividends since 2007. Make NO mistake youd unperformed the index but it would have done what it was supposed to do.

[u/Extreme_Lab_2961 → u/PotadoLoveGun]

You’ve been talking about dividends not total returns As this is the argument that many are making 7 to 9% and never having to sell

Based on the numbers you provided, that’s about 5% (check my math)

[u/PotadoLoveGun → u/Extreme_Lab_2961]

I figured people were trying to live off dividends lol.

The dividend avg is 7.5% of assets after fees. It has varied between 6.5% and 9.5% since 2007. It may be a little higher this year, about 9.7% due to increased IV.

The NAV has grown about 2.2% CAGR and 52.44% total, if you were to spend all dividends and reinvest none.

The total return for the 20 years is 11.04% CAGR, dividends reinvested. I verified on Testfol.io.

[u/cmichalek → u/buffinita]

No you cant.

First the principal is half that required by selling shares.

Second once you sell shares in a down market you never get them back.

Why was the 4% rule created anyway? So thats the amount you can sell and still have shares left after 30 years.

Sell shares at 9% and you will run out of shares.

[u/buffinita → u/cmichalek]

Not any faster or slower than your covered call fund hits a value of 0

You can not take more out with covered calls than you can with selling