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I'm considering putting most of my savings (about 55,000 €) in an ETF with focus on dividend payments as I want some of the returns accessible to me without having to sell. I'm planning to go with Vanguard High Dividend Yield ETF there.

My intention is to build up wealth, preferably to that point where the dividend payments are of a significant amount. To my current understanding with the amount I have I'd get something around 100 € on average per month.

I don't plan making bigger spendings in the next ten year range, except when I inevitable will need a new car.

I currently have about 800 € per month that I don't spend which I then would also intent to put in that ETF instead of into my savings account.

I'll keep at least 7,000 € in my savings account as my emergency fund.

I've been thinking if I want to buy something bigger I can temporarily stop putting the 800 a month in the fund and start saving it up again.

Given my situation would it be reasonable to just put the remaining 48,000 € into an ETF? Or is it too risky/making me too illiquid? Should I diversify more?

EDIT Information about Austrian taxes on capital gains:

  • Both dividends and gains in value are taxed at 27,5 %
  • Dividend payments are taxed fully when they happen
  • Gains in value are taxed partially every year, the remaining gain is taxed when the asset is sold. The amount which is taxed yearly depends on a few things like whether it's foreign, registered for gain notification (?), ... which I don't fully understand the rules of
  • In some cases dividends that are reinvested may be taxed less but I'm not sure on the rules here either
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    What are the tax implications in the UK of dividends? When do you want to start living off your dividends? If you invest for the long term, it's not (yet) risky, and it won't make you illiquid (someone will want to buy those shares). As for diversification, that all depends on what ETF(s) you invest it. – RonJohn Jan 10 at 16:23
  • You removed an edit regarding how Austria taxes dividends and capital gains. How does Austria tax them? – RonJohn Jan 10 at 19:52
  • I'm aware that I could theoretically sell them any time but if there's a market crash just when I need the money I'd be loosing money if I sell then – Jimmy R.T. Jan 10 at 19:53
  • "I'd be loosing money if I sell the(m)". That doesn't make them illiquid. (I asked that exact same question a few weeks ago.) Liquidity is about transaction costs, not market value. – RonJohn Jan 10 at 19:56
  • Yeah, illiquid isn't the right term but it's the closest I could think of in regard with the problem of volatility – Jimmy R.T. Jan 10 at 20:22
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VTI has historically outperformed VYM and gives you much more exposure. If you have an extra 800 to invest every month, it doesn't sound like you really need the extra dividends right now. You'd also have to pay more taxes on those dividends.

My recommendation would be a 3-fund portfolio [1]. I would wait until you actually need the passive income before you invest in VYM. Otherwise you're (probably) sacrificing performance and paying more taxes for no reason.

[1] https://www.bogleheads.org/wiki/Three-fund_portfolio

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  • This answer seems US-specific. – RonJohn Jan 10 at 16:16
  • It seems Us specific to me too – Raj Jan 10 at 18:27
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    @RonJohn I'm actually from Austria, don't know why someone added UK given that the UK doesn't even use Euros – Jimmy R.T. Jan 10 at 19:44
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    @user13676 my silly brain saw "Euro" and thought "Pound Sterling", when I clearly knew the difference. – RonJohn Jan 10 at 19:45
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    @RonJohn OP asked about VYM, james suggested VTI as an alternative. Both are US based so will be subject to the same tax laws. The answer doesn't seem US based since OP is already considering US based funds. If james had suggested VUSA instead (a US market tracking UK based fund) then that would be different. – Dugan Jan 11 at 16:02
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From your post, it sounds like you're only putting your money into a single ETF. My opinion is that it's always too risky to place all of your money in one fund, even if it's an ETF. I think diversification is always wise, and that you'd do well to split that money among a few different funds/ETFs.

After all-- what happens if that particular ETF takes a sharp nose-dive around when you're ready to withdraw from it? You'd be in a crummy situation as you now have to take money out of an under-performing account. If you diversify into a few other funds, you can withdraw based on what you want to withdraw from at the time (IE tax implications, or if you think that one fund will see a large amount of growth in the near future, but another one will start to decline, etc.)

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  • Isn't the point of a general market ETF diversification? I was under the assumption that ETFs that cover a wide market will all go down when the market is weak, at least that seems to be the case when I look at past performances of different ETFs – Jimmy R.T. Jan 10 at 20:16
  • I'm dubious that that one ETF would nose dive independent of all other ETFs (especially if that ETF is composed of large-cap companies which are stable enough and consistently profitable enough to be grouped into a High Dividend ETF. – RonJohn Jan 10 at 20:17
  • You are correct that ETFs cover a wide range. But ETFs are still fallible, just like everything else. In the event of some sort of economic downturn, high dividend ETFs will likely be worth significantly less and will have a much lower yield. I think it's wise to have a stable investment (something like foodstuff, that probably isn't growing, but that people will always need to buy to survive) on the side so that you're less likely to be forced to withdraw from a fund at an inopportune moment. – NegativeFriction Jan 10 at 20:37
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Most of my equity investments are in High Dividend funds (both mutual and ETF), because -- in addition to the consistent healthy dividends -- they show good capital gains growth, and did not fall as far during, and recovered quicker after, the 2008 crash.

(This is the US, though, and they're in tax-advantaged accounts. YMMV; in fact it certainly will.)

EDIT: companies that pay consistent dividends for decades are -- almost by definition consistently profitable. They tend to be large, well-run, and in industries that are (relatively) immune to recession -- you need toilet paper and toothpaste no matter what, and that stuff needs to be transported from wherever it's manufactured to wherever you live, and someone needs to sell it to you.

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  • Can that be explained by having some security in the form of dividends? – Jimmy R.T. Jan 10 at 20:24
  • @user13676 can what be explained? – RonJohn Jan 10 at 20:26
  • Why they weren't hit as hard from the 2008 crash – Jimmy R.T. Jan 10 at 20:30
  • @user13676 edited the answer. – RonJohn Jan 10 at 20:36
  • I'm not sure I buy the "you need toilet paper and toothpaste no matter what" argument, because you might still cut costs by getting cheaper toilet paper and toothpaste (or substitute) when times are tough. Granted, these two specific items are probably pretty low on the list of things to cut back on, but still, categorically, so-called "recession proof" industries merely (as you mention) "don't fall as far" as you can cut back, but less. Still, I guess that's nothing to sneeze at, more of a nitpick on that expression more than anything else. – Michael Jan 10 at 23:54

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