Reinvested Dividends: Growth of 8 Simple ETF Portfolios

Dividend reinvesting helps increase the total value of an investor's portfolio; here we look at the effect of dividend reinvesting on the total returns of eight simple exchange-traded fund (ETF) portfolios discussed in a previous post on portfolio diversification for lazy investing. These eight portfolios allow investors to be diversified, while keeping the number of necessary transactions low, as well as the overall expenses of the portfolio. 


"What is a dividend?" is a common question; simply put: dividends are cash distributions made by a company to its shareholders. Investopedia has a quick video that goes further into what a dividend is. Several brokerages, like Schwab, TD Ameritrade, and E*Trade, offer dividend reinvestment plans which allow automatic reinvestment of dividends on the day they are paid out thus making it easy to reinvest dividends; these plans usually allow the purchase of fractional shares. 

Growth of $10,000 

The graphs below show the growth of $10,000 dollars over the course of two years to illustrate the overall success of each of eight simple ETF portfolios; these graphs also highlight the importance of dividend reinvestment on the total returns of the assets within each portfolio. The total returns of each portfolio which include dividend reinvesting are shown as a black line, while the total returns without the reinvestment of dividends are shown in red.  

For comparison, the graph below shows the growth of $10,000 invested in iShares Core S&P 500 ETF (IVV). With dividend reinvestment, there would be a growth of about $2100; without dividend reinvestment the growth is $500 less.   

Portfolios

1. Allan Roth’s Second Grader Portfolio
   • 60% Vanguard Total Stock Market ETF (VTI)
   • 30% Vanguard Total International Stock ETF (VXUS)
   • 10% Vanguard Total Bond Market ETF (BND)
   
   
   
   
   
   The first portfolio is Allan Roth's Second Grader portfolio. This aggressive portfolio, composed of 90% stocks, earned approximately $1086 over the last two years with the reinvestment of dividends. An investor who did not consider reinvesting dividends would have earned approximately $330 less. 
   
   
2. David Swenson’s Ivy League Portfolio
   • 30% Vanguard Total Stock Market ETF (VTI)
   • 5% Vanguard Emerging Mkts ETF (VWO)
   • 15% Vanguard Europe Pacific ETF (VEA)
   • 20% Vanguard REIT ETF (VNQ)
   • 15% Vanguard Intermediate-Term Government Bond ETF (VGIT); replaced with iShares Barclays 7-10 Year Treasury Bond Fund (IEF)
   • 15% iShares Barclays TIPS Bond (TIP)
   
   
   
   
   
   The Ivy League portfolio, whose goal is to mimic some of the success of Harvard and Yale endowments, has better earnings than the Allan Roth's Second Grader portfolio; over $400 more. In addition to this, the reinvestment of dividends in this portfolio turns out to be more important by producing an increase in the total return on assets of approximately $480. 
   
   
3. Rick Ferri’s Core Four Portfolio
   • 36% Vanguard Total Stock Market ETF (VTI)
   • 18% Vanguard Total International Stock ETF (VXUS)
   • 6% Vanguard REIT ETF (VNQ)
   • 40% Vanguard Total Bond Market ETF (BND)
   
   
   
   
   
   Even though this portfolio seems like a subset of the Ivy League portfolio when asset correlations are considered, it performs almost the same as Allan Roth's Second Grader Portfolio. 
   
   
4. Bill Schultheis’ Coffeehouse Portfolio
   • 10% Vanguard S&P 500 Index ETF (VOO); replaced with iShares Core S&P 500 ETF (IVV) 
   • 10% Vanguard Value ETF (VTV)
   • 10% Vanguard Small-Cap ETF (VB)
   • 10% Vanguard Small-Cap Value ETF (VBR)
   • 10% Vanguard Total International Stock ETF (VXUS)
   • 10% Vanguard REIT ETF (VNQ)
   • 40% Vanguard Total Bond Market ETF (BND)
   
   
   
   
   
   The Coffeehouse portfolio by Bill Schultheis has more ETFs than the Ivy League portfolio, but its growth is slightly worse in both cases of with and without dividend reinvestment. 
   
   
5. Larry Swedroe’s Big Rocks Portfolio
   • 9% Vanguard S&P 500 Index ETF (VOO); replaced with iShares Core S&P 500 ETF (IVV)
   • 9% Vanguard Value ETF (VTV)
   • 9% Vanguard Small-Cap ETF (VB)
   • 9% Vanguard Small-Cap Value ETF (VBR)
   • 6% Vanguard REIT ETF (VNQ)
   • 3% Vanguard Total International Stock ETF (VXUS)
   • 6% SPDR S&P International Dividend (DWX)
   • 3% Vanguard FTSE AW ex-US Sm-Cap ETF (VSS); replaced with iShares MSCI EAFE Small Cap (SCZ)
   • 3% WisdomTree International SmallCap Div (DLS)
   • 3% Vanguard Emerging Mkts ETF (VWO)
   • 40% Vanguard Short-Term Bond ETF (BSV)
   
   
   
   
   
   Larry Swedroe's Big Rocks portfolio has the greatest numbers of ETFs, yet it does not have the highest total return of the eight lazy investing portfolios. In fact, it performs worse than the Second Grader portfolio. 
   
   
6. Harry Browne’s Permanent Portfolio
   • 25% Vanguard S&P 500 Index ETF (VOO); replaced with iShares Core S&P 500 ETF (IVV)
   • 25% Vanguard Long-Term Government Bond ETF (VGLT); replaced with iShares Barclays 20 Year Treasury Bond Fund (TLT)
   • 25% SPDR Gold Trust ETF (GLD)
   • 25% Cash (i.e., money market funds); not included
   
   
   
   
   
   The Harry Browne's Permanent portfolio is a small portfolio, but it performs the best out of the eight lazy investing portfolios presented here. This is due to strong performances in recent years by all three ETFs in the portfolio; the permanent portfolio performs better than the Ivy League portfolio by about $700. 
   
   
7. William Bernstein’s No Brainer Portfolio
   • 25% Vanguard S&P 500 Index ETF (VOO); replaced with iShares Core S&P 500 ETF (IVV)
   • 25% Vanguard Small-Cap ETF (VB)
   • 25% Vanguard Total International Stock ETF (VXUS)
   • 25% Vanguard Total Bond Market ETF (BND)
   
   
   
   
   
   The William Bernstein No Brainer portfolio is similar to Rick Ferri's Core Four portfolio in terms of asset correlations and has total returns on assets that are very similar, as well.
   
   
8. Harry Markowitz’s "Father of Modern Portfolio Theory" Portfolio
   • 50% Vanguard Total World Stock ETF (VT)
   • 50% Vanguard Total Bond Market ETF (BND)
   
   
   
   
   
   This is the simplest out of the eight ETF lazy investing portfolios, and it is the worst performing portfolio of the eight earning only about $800 in the last two years.   

Conclusion

Reinvestment of dividends helps to boost the performance of portfolios. Across the eight portfolios shown above there is an average of $300 in additional total returns when dividends are reinvested over a two year period; this effect will compound over multiple years as additional shares bought with dividends accumulate dividends themselves. Neither the simplest, nor the most complex portfolios had the highest total returns. The Permanent portfolio had the highest total returns with the Ivy League portfolio coming in second with about $700 less, and it should also be noted that the Permanent portfolio earned only slightly more (about $50) than simply investing in the S&P 500.