The Best M1 Finance Dividend Pie for FIRE & Income Investors

Financially reviewed by Patrick Flood, CFA.

M1 Finance is extremely popular among dividend investors. Here I'm sharing what I believe to be the best high-dividend pie for M1 Finance dividend income investors.

Prefer video? Watch it here.

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I would definitely suggest you read my preliminary discussion before blindly investing in this pie to make sure it matches your strategy. That said, I hate when recipe websites tell a long story before putting the actual recipe at the very bottom. So if you're in a hurry, you can click here to skip to the pie.

Introduction

M1 Finance is extremely popular among dividend income investors, and rightfully so, with its intuitive interface, sleek mobile app, stock and fund screeners, zero fees, fractional shares, cheap margin rates, and automatic rebalancing. To be clear, I'm not a dividend investor, but I recognize that many investors, especially those in the FIRE movement (Financial Independence Retire Early), use dividends as regular income and thus attempt to ratchet up their portfolio's dividend yield.

Unfortunately, for beginner investors interested in dividends, oftentimes this entails simply screening for the highest-yield stocks and ETF's and throwing them in a pie, ignoring things like fees, AUM, liquidity, and most importantly, what that fund's selection methodology or underlying index is. I always encourage people to focus more on asset selection and asset allocation than on chasing high yield per se. I would suggest assembling a dividend focus that still employs diversification across geographies and asset types to decrease portfolio risk; that's what I tried to do here.

Methodology and Discussion

In constructing the best dividend pie for M1 Finance, I specifically focused on the following:

• Global diversification.
• Low fees.
• Sufficient AUM and liquidity.
• Exposure to multiple equity factors and styles.
• Diversification across asset types.
• 80/20 ratio of stocks to fixed income.
• Inflation protection.
• No individual stock picking.
• Potential for healthy dividend payments and simultaneous capital appreciation.

Note that with this dividend pie, you'll have little to no exposure to Growth stocks. This could be good or bad going forward in regards to capital appreciation. If the Value premium still exists (I believe it does), Value is currently the “cheapest” it's ever been, making it potentially poised for a comeback. Value has beaten Growth historically, though Growth has crushed Value over the past decade largely due to Big Tech's stellar performance. For that reason, you may opt to use this pie as a smaller piece inside your portfolio rather than as your entire portfolio, or incorporate it into a “lazy portfolio.”

In terms of equity factors, we know that dividend investing on the whole is largely rooted in Value, and that the dividend payment itself is not responsible for a stock's performance. Specifically, high-yield funds like VYM and VYMI, for example, have more factor loading on Value, while dividend growth funds like VIG and VIGI have more loading on Quality. I've included all 4 of those funds, and more, to diversify the pie's factor exposure. The pie has consistent, positive loading on all 5 of the Fama-French factors in the 5-Factor Model (Beta, Size, Value, Profitability, and Investment), as well as both fixed income risk premia – term and credit.

Several of these funds employ some form of earnings screen to weed out potentially volatile, unstable companies. Because of that, the yield of the pie as a whole may indeed be lower than your target yield or the yield of your current high-dividend strategy. For example, a pure yield chaser usually might not include VIG or VIGI in their high-dividend pie since they have a comparatively lower yield. I would argue their inclusion should bode better for stability, lower volatility, and greater capital appreciation and risk-adjusted return over the long term than chasing the highest yield per se, which has historically been an indicator of potentially unstable companies.

As an aside, for those looking for income and considering covered call funds like QYLD, RYLD, NUSI, DIVO, etc., don't do it!

Why Not M1's Dividend Expert Pies?

M1 Finance already has some Expert Pies focused on dividends, so why use mine instead?

Their “Bank Balance Sheet” pie is comprised of 70% mortgage-backed securities, 17% intermediate-term treasury bonds, and 13% municipal bonds. I don't want a bond portfolio weighted so heavily to MBS, we already have some treasury bonds (of which long-term will offer more protection), and municipal bonds primarily only provide a tax savings for high income earners. MBS and munis are also more correlated to the market than the treasury bonds that I'm proposing. In short, no thanks.

M1's “Domestic Dividend” Expert Pie is almost entirely VIG, which I've included in mine. The other 2 ETF's are high-expense-ratio small- and mid-cap funds from WisdomTree. I'm proposing some small- and mid-cap dividend exposure via DGRO from iShares. We also get a little bit from VIG.

Moreover, the Domestic Dividend pie is also just a dividend-oriented pie and is not necessarily a high-yield pie. Their “Global Dividend” Expert Pie simply adds some very-high-expense-ratio international dividend funds. I'm advocating for IDLV below as a low-ER international ETF, as well as Vanguard's low-cost offerings of VYMI, VIGI, and VNQI.

The “Domestic Dividend” and “Global Dividend” pies also have no allocation to fixed income.

My M1 Finance Dividend Pie

I constructed this dividend pie for M1 Finance with the following ETF's:

• SCHD – Schwab US Dividend Equity ETF – Tracks the Dow Jones U.S. Dividend 100 Index.
• HDV – iShares Core High Dividend ETF – Tracks the Morningstar Dividend Yield Focus Index.
• SPYD – SPDR® S&P 500 High Dividend ETF – Tracks the S&P 500 High Dividend Index.
• VYM – Vanguard High Dividend Yield ETF – Tracks the performance of the FTSE® High Dividend Yield Index. Excludes REITs.
• VYMI – Vanguard International High Dividend Yield ETF – Tracks the FTSE® All-World ex US High Dividend Yield Index. Excludes REITs.
• VNQ – Vanguard Real Estate ETF – diversification benefit from the low correlation of REITs to the stock market.
• VNQI – diversification benefit from the low correlation of international REITs to both the US and ex-US stock markets.
• IDLV – Invesco S&P International Developed Low Volatility ETF – International exposure to low volatility dividend payers at a lower expense ratio than most international equity ETF's.
• VIG – Vanguard Dividend Appreciation ETF – companies with at least 10 consecutive years of an increasing dividend payment.
• DGRO – iShares Core Dividend Growth ETF – companies with at least 5 consecutive years of an increasing dividend payment. More inclusive than VIG; able to capture some small- and mid-cap exposure.
• VIGI – Vanguard International Dividend Appreciation ETF – international companies with at least 10 consecutive years of an increasing dividend payment.
• SCHP – Schwab U.S. TIPS ETF – Tracks the Bloomberg Barclays U.S. Treasury Inflation-Linked Bond Index. Offers inflation protection. Average maturity of 8 years.
• USHY – iShares Broad USD High Yield Corporate Bond ETF – broad exposure to high yield corporate bonds. Average maturity of 5.5 years.
• EDV – Vanguard Extended Duration Treasury ETF – Tracks the Bloomberg Barclays U.S. Treasury STRIPS 20–30 Year Equal Par Bond Index – Offers protection for stock crashes. Average maturity of 25 years. Interest from treasury bonds is tax-free at state and local levels.

Allocations are as follows:

• 15% SCHD
• 5% HDV
• 5% SPYD
• 10% VYM
• 10% VYMI
• 10% VNQ
• 5% VNQI
• 5% IDLV
• 5% VIG
• 5% DGRO
• 5% VIGI
• 10% SCHP
• 5% USHY
• 5% EDV

You can add this dividend pie to your M1 Finance portfolio by clicking this link. Enjoy.

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What drives your dividend strategy? Do you use any of these funds in your portfolio? Let me know in the comments.

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Disclaimer:  While I love diving into investing-related data and playing around with backtests, this is not financial advice, investing advice, or tax advice. The information on this website is for informational, educational, and entertainment purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a research report. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. I always attempt to ensure the accuracy of information presented but that accuracy cannot be guaranteed. Do your own due diligence. I mention M1 Finance a lot around here. M1 does not provide investment advice, and this is not an offer or solicitation of an offer, or advice to buy or sell any security, and you are encouraged to consult your personal investment, legal, and tax advisors. Hypothetical examples used, such as historical backtests, do not reflect any specific investments, are for illustrative purposes only, and should not be considered an offer to buy or sell any products. All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future results. Opinions are my own and do not represent those of other parties mentioned. Read my lengthier disclaimer here.