Should you invest in Index Funds or Dividend Stocks?

Index Funds vs. Dividend Stocks

The old question of whether one should invest in an index funds or try their luck at dividend investing. Online I see many people advocating for one over the other. However, I personally don’t have this mindset. I see no reason a person can’t do BOTH. That’s what I do and will continue to do.

My Roth IRA-Index Funds

For instance, I hold largely index funds in my retirement accounts and only dividend stocks in my brokerage. Why? Different goals require different approaches.

My retirement account goal is to capture the total return of the market. It’s to build up my net worth into old age. This is money I won’t touch for 20 years. The great thing about index investing is it’s easy to do and doesn’t require much work at all. Mutual Funds and ETF’s are a great way to diversify. In addition, it’s great for those that have no interest in researching stocks; for example, looking at balance sheets and watching charts.

I own the Vanguard Total Stock Market Index in my Roth IRA; it’s done great since 2009. That was the only investment I had for over 10 years! I also added the Vanguard REIT index and Intermediate Bond Index Fund (VBILX) to that account last year. I probably look at that account once every two months or so. I only enter the account to make a purchase or reinvest dividends.

Traditional IRA-Sector Funds, Bond Funds

My Traditional IRA is slightly more active. I hold the Fidelity 4 in 1 fund in it. This is, in my opinion, a GREAT beginner investor fund. It’s already a bit diversified (equities, bonds, international). I also own the Fidelity Long-term bond fund and a Healthcare sector fund in this account as well. Besides the funds, I own two REITs, Kroger’s stock and Sterling Construction (a growth stock) inside my IRA. It’s a few levels above set it and forget. I like holding the REIT’s in my IRA because they spit out income that I can then reinvest within my IRA (even if I’m over the max contribution). Kind of a sneaky way of investing even more than normally possible 🙂

Brokerage account-Dividend Focused

Lastly is my brokerage account; the most time consuming and perhaps the most fun (at least on the days it’s not going down!). The goal of my brokerage account is for TODAY money. My first goal is to generate $100 a month from dividends in this account. A longer-term goal is $500 a month. At some point, I’ll use the income from this account to pay bills and assist in my living. I’m self-employed and some months my income is better than others, dividend investing helps smooth it out. Since my goal is income, the index funds are not the tool for the job. I would have to sell them and depend on market conditions to withdraw.

I think of dividends as having a steady/consistent check. Sure, it requires initial research and reading balance sheets but once it’s done you don’t have to watch the markets every day if you don’t want (I usually do because i enjoy it). You can be a dividend investor and check in once every two weeks or so and still be fine. Perhaps even longer in the right environment. Some will argue that dividends can be cut and they are right but that’s why you do the best research you can and why you hold MANY stocks. If something goes wrong with one, the others are there to take up the slack. I own SEVENTEEN companies, some people own FORTY. I can’t EVER see myself holding that many stocks. Heck, I’ve had trouble finding 17 I want to hold long-term.

Anyways, I’m here to tell you, don’t ever feel like you have to choose. There is room for both in the world of investing. You have to search for your own goals and make a plan on how to reach them. Most importantly, whatever methods you pick, be consistent. That is the key to all of this.