Should I switch my $100K from VOO to MAIN for higher dividends despite losing growth potential?

The Vanguard S&P 500 ETF (NYSEARCA:VOO | VOO Price Prediction) is a main go-to for many passive investors. And while even the great Warren Buffett thinks investors should bet on the main stock index, there are those out there who just aren’t satisfied by betting on 500 of America’s top firms. Indeed, the S&P 500 will allow you to effectively and cheaply bet on the broad U.S. market. And while it’s the standard to watch, it isn’t a perfect investment for everyone, especially for those with higher income needs.

The S&P 500 and even a broader total stock market fund, such as the Vanguard Total Stock Market Index Fund ETF (NYSEARCA:VTI), don’t offer a very generous yield. At around 1%, it’s just not a great fit for those who depend on investment income to meet their monthly costs of living (which have gone up in recent years).

The S&P 500 is great. But it lacks on the yield front.

With the huge emphasis on technology stocks, which tend to yield far less than their low-tech counterparts, it should be no surprise that the S&P 500 yields just over 1%. Of course, sticking with the S&P 500 (the market) return and going by the “4% rule,” which entails drawing down 4% annually, may be the best way to go. However, for those who don’t want to have to sell stocks every so often, a dividend-focused strategy may be more carefree and hands-off.

Unfortunately, you’re not getting that 4% yield from the S&P 500. But by jumping ship to another ETF or stock, one can trade off some of that capital appreciation potential for more dividends. In this piece, we’ll check in on a case involving an individual who’s considering making such a trade-off with their $100,000 in invested principal. But are there risks of ditching the VOO, VTI, or something similar for a higher-yielding name? Let’s dive in.

How much more dividends could one get by switching from VOO to MAIN?

Main Street Capital (NYSE:MAIN) is a 7.38%-yielding stock that pays out a monthly dividend. The asset manager has a steady history of paying (and growing) its payout, and is actually a favorite pick among retail investors, especially those in the r/dividends subreddit community. Indeed, such a huge yield and getting cut a check on a monthly (rather than quarterly) basis seems too good to be true! And while some income investors may swear by the name, I do think the full extent of the risks should be considered before even thinking about making the jump.

Though Main Street stock’s track record really does speak for itself after gaining 47% in five years while rewarding investors with juicy and more frequent dividend payments, I’d be cautious when plowing stocks from a diversified basket of 500 names (the S&P) into one single stock. Dumping VOO for MAIN could have the potential to cause diversification issues if the investor owns nothing else other than the S&P 500. Having too much single-stock risk could leave one incredibly vulnerable.

And while the $7,380 (on $100,000 in invested principal) or so in annual income is surely appreciated, I would factor in the added risks of failing to diversify one’s portfolio. Indeed, MAIN stock can be a nice part of a diversified portfolio. But to plow such a huge amount from a diversified index fund, I believe, introduces considerable risk that, in my view, could be far better managed.

VOO vs. MAIN: What would I do?

For those keen on MAIN stock, I see no issue in selling off a portion of the VOO (let’s say 25% or so) and using the proceeds to pick up the monthly income darling. After all, it’s no mystery why the remarkable stock has the love of dividend investors: its shares can gain as it pays out a generous dividend. At the end of the day, risks should be managed appropriately. Unfortunately, many investors lose sight of risk management once a huge yield flies by their radar.