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Blue Chip Down Payment

April 24th, 2013 at 07:16 pm

I've been looking into high yield dividend mutual funds as a possibility for investing our down payment money for the next house. This would be an alternative to keeping the money in our money market account paying 0.85%.

Blue Chip stocks are those companies that are generally worth billions, thus established in their field, often a household name, and pay steady or rising dividends each year (paraphrased from

Text is Investopedia and Link is
Investopedia). The mutual funds I'm looking at invest in these blue chip stocks, like Coca Cola, IBM, UPS, and Exxon.

The returns on these funds the last few years are definitely better than the 0.85% we are getting on our money market. Of course, the money market account is less risky than stocks. Stocks do fluctuate, thus that risk scares me a little bit given this is a short term investment of 2 years...maybe 3.

I do need to convince my husband it is the right thing to do. I think he will trust my judgement. Thus I really need to convince myself!!

Generally, this isn't something I would advise anyone to do because of the risk, but with additional risk, often comes additional reward. Does anyone reading this know of anything that should keep me from taking the risk of investing in a Dividend Growth fund?

I'm looking at VDIGX and VDAIX, which are both held at Vanguard. Both have 5 star ratings from Morningstar. If we had held VDIGX two years ago, our money would have increased by nearly $7K by now. However, if our two year period was April 2007 to today, we would have lost $6,700 from our initial investment.

The dividends that are paid would be reinvested to buy more shares, and would be taxed just like ordinary income, which is no different than if we earned interest. If someone were to hold this fund in a retirement account, those reinvested dividends are tax deferred until retirement.

I feel positive about the over all outlook, so I think it should be a buy. What do you think? Anything else I should look at?

6 Responses to “Blue Chip Down Payment”

  1. ceejay74 Says:

    No advice, but I'm watching with much interest! Once the student loan I'm tackling is paid off, we're going to dump money into the down-payment fund. Right now we've got about $4K in savings. I'm considering a 50-50 split between savings and blue-chip funds after reading your exchange with baselle. Before that I was all cash, all the way, because this is short-term money (3-4 years before we spend it).

  2. snafu Says:

    Interview with J Bogle of Vanguard fame who advises no less than 3 yr., ideal minimum 5 yr. for any mutual fund. Most important to examine fees and MER [Management Expense Ratio]. They also have a Bond Fund which is good as long as interest rates don't suddenly jump. Bonds go up in value when rates go down, lose value when interest rates go up.

  3. creditcardfree Says:

    Thanks snafu, I am aware that our time line makes things a little risky for this type of investment. And I will be looking at the bond fund...which I think you are implying would be a better option.

  4. ceejay74 Says:

    Our timeline is 3.5 years, might be longer, so it would probably be a good option.

    One of my Facebook friends commented on this issue when I posted to my Ordinary Savers group, saying I could save the money in my Roth. I believe you max your Roths for retirement already, so not an option for you. I feel unaccountably turned-off by the thought of mingling my retirement and house down-payment funds, even though it seems to make good sense!

  5. creditcardfree Says:

    @ceejay, yes your timeline is longer so a better option. Part of me still wants to take the risk. And we do max our Roth IRA's so that doesn't work for us, which I don't think I would do because it complicates things more. The only real benefit would be that the earnings would build tax free while you are saving rather than paying tax on the dividends.

  6. BuckyBadger Says:

    I wouldn't personally invest money needed in that sort of time frame. You say how safe it is, how it's practically guaranteed. If that were so, why hasn't *everyone* figured that out? Why isn't *everyone* invested in that?

    There's no guarantee in investing -- unless you consider the thought that overall, in general, the market will trend up over the next 30 years. (If we didn't believe in that, we wouldn't invest at all, right?)

    Anyway, I wouldn't invest money you need in that time frame. Just because they are big household names doesn't make them immune to problems. (Look at Kodak, Xerox, the american car companies...)

    And the return on practically EVERYTHING over the last three years has been good. The market has had an incredible climb and recovered all the ground that it lost and more. But that doesn't mean it's not going to have a hiccup, and that it can't be in your time frame.

    If (all) stocks weren't doing so incredibly well right now would you even be considering this move?

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