Reinvest Dividends or Use those Funds to Rebalance?

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Topic Author
TVKNSC
Posts: 97
Joined: Fri Feb 01, 2013 11:07 am

Reinvest Dividends or Use those Funds to Rebalance?

Post by TVKNSC »

I currently have my dividends from VTIAX and VTSAX being reinvested. When it comes to rebalancing each year, I would prefer to add new monies vs. having to sell a portion of current assets to get back to my desired AA.

My only issue with not reinvesting dividends is losing some of the power of compounding interest in those stock funds.

If not reinvesting dividends makes the most sense for my situation, should those funds be placed into a high-yield savings account or something similar until needed for rebalancing?

I appreciate the support.

Emergency funds: Yes. 6 months worth
Debt: car loan = $12,000 (1.9%) and 30-year mortgage = $235,000 (3.4%)
Tax Filing Status: Married Filing Jointly
Tax Rate: 25%
State of Residence: SC
Age: 36
Desired Asset allocation: 75% stocks / 25% bonds
Desired International allocation: 25% of stocks

Current retirement assets

His 401k at ROTH TSP = 9.7% of assets
$22,000 in G-Fund (0.025%). I contribute $17,500 per year
Company match? NO

His Roth IRA at Vanguard = 24.11% of assets
$54,263 in LS Growth (0.17%)

Her Roth IRA at Vanguard = 29.77% of assets
$67,000 in LS Growth (0.17%)

Her Individual Stocks in VG ROTH IRA Brokerage Account: 4.4% of assets
$10,000 (Kelloggs and Johnson and Johnson)

VTIAX taxable (Admiral): $30,066/ 0.14% ER/ 13.36% of assets
VTSAX taxable (Admiral): $42,249/ 0.05% ER/ 18.77% of assets

Contributions

New annual Contributions
$5,500 his Roth IRA
$5,500 her Roth IRA
Last edited by TVKNSC on Sun Mar 30, 2014 10:21 am, edited 1 time in total.
“There seems to be some perverse human characteristic that likes to make easy things difficult. ” ― Warren Buffett
gvsucavie03
Posts: 1460
Joined: Sat Feb 16, 2013 7:30 am

Re: Reinvest Dividends or Use those Funds to Rebalance?

Post by gvsucavie03 »

I assume the funds in a taxable account now?
Topic Author
TVKNSC
Posts: 97
Joined: Fri Feb 01, 2013 11:07 am

Re: Reinvest Dividends or Use those Funds to Rebalance?

Post by TVKNSC »

Yes. Taxable.
“There seems to be some perverse human characteristic that likes to make easy things difficult. ” ― Warren Buffett
gvsucavie03
Posts: 1460
Joined: Sat Feb 16, 2013 7:30 am

Re: Reinvest Dividends or Use those Funds to Rebalance?

Post by gvsucavie03 »

I would think the compounding of reinvested dividends exceeds the hassle and tax implications of a rebalance (and probable sale of some shares) each year. Since you aren't allocating new money to your taxable accounts (or didn't list on your edited OP), you're only left to either use the dividends or sell shares. I'd much rather see those dividends compounded and pay a little more to Uncle Sam...

Also, the correlation to total US and total Int. is very similar, so the rebalancing is very likely to be minimal.
moshe
Posts: 565
Joined: Thu Dec 12, 2013 12:18 pm
Location: Boston, MA

Re: Reinvest Dividends or Use those Funds to Rebalance?

Post by moshe »

TVKNSC wrote:I currently have my dividends from VTIAX and VTSAX being reinvested. When it comes to rebalancing each year, I would prefer to add new monies vs. having to sell a portion of current assets to get back to my desired AA.

My only issue with not reinvesting dividends is losing some of the power of compounding interest in those stock funds.
I am not a math pro but if i receive $10 in dividend income and purchase some money generating asset, more of the same asset or a new money generating asset(assuming a similar dividend %) does it make a difference mathematically if i invest in more of the same asset or buy a new asset? I don't think so but i may be wrong.

On the other hand if i spend the $10 rather than reinvest it in some additional cash producing asset then the difference in long term performance is huge.

~Moshe
My money has no emotions. ~Moshe | | I'm the world's greatest expert on my own opinion. ~Bruce Williams
Topic Author
TVKNSC
Posts: 97
Joined: Fri Feb 01, 2013 11:07 am

Re: Reinvest Dividends or Use those Funds to Rebalance?

Post by TVKNSC »

GV,
Thanks. No, I will only add money to those taxable accounts if I have funds leftover after maxing out my ROTH TSP and IRAs. As yearly rebalancing approaches, one option I just thought of is to make a temporary contribution allocation adjustment to my TSP if my desired AA gets out of whack (5/25).
“There seems to be some perverse human characteristic that likes to make easy things difficult. ” ― Warren Buffett
gvsucavie03
Posts: 1460
Joined: Sat Feb 16, 2013 7:30 am

Re: Reinvest Dividends or Use those Funds to Rebalance?

Post by gvsucavie03 »

TVKNSC wrote:GV,
Thanks. No, I will only add money to those taxable accounts if I have funds leftover after maxing out my ROTH TSP and IRAs. As yearly rebalancing approaches, one option I just thought of is to make a temporary contribution allocation adjustment to my TSP if my desired AA gets out of whack (5/25).
Bingo. :beer
livesoft
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Re: Reinvest Dividends or Use those Funds to Rebalance?

Post by livesoft »

TVKNSC wrote:If not reinvesting dividends makes the most sense for my situation, should those funds be placed into a high-yield savings account or something similar until needed for rebalancing?
No. Use the dividends and cap gains distribution as soon as you receive them to rebalance. Do not let them languish in a savings account. Otherwise, you will have a cash drag on your "compounding". Of course, check that the fund you are about to invest into is not itself going to pay a dividend in the next few days. If so, just wait for that dividend, then invest.

I already have plans for the dividends that I will get Monday morning.
Last edited by livesoft on Sun Mar 30, 2014 12:00 pm, edited 2 times in total.
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jackholloway
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Re: Reinvest Dividends or Use those Funds to Rebalance?

Post by jackholloway »

Right now, I have small, mid, and large cap, plus s&p and total stock indices in taxable, all with capital gains. My desired AA is to have slightly more in stocks than I now do (in taxable). I am thus reinvesting dividends in TSM, which is where I would move all of the above if there were no tax implications.

I am thus rebalancing via dividend reinvestment.
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hoppy08520
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Re: Reinvest Dividends or Use those Funds to Rebalance?

Post by hoppy08520 »

livesoft wrote:Of course, check that the fund you are about to invest into is not itself going to pay a dividend in the next few days. If so, just wait for that dividend, then invest.
Livesoft, why is this? Won't it all equal out whether you invest right before or right after the fund's dividend payout? You'll either buy at a high NAV, then get a dividend and have your NAV reduced, or buy at the lower post-dividend NAV; same either way. Or is your point that if you buy shares right before the dividend, then you'll just wind up needing to make another trade a few days later with the new dividends? Or is there some other reason? Thanks.
livesoft
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Re: Reinvest Dividends or Use those Funds to Rebalance?

Post by livesoft »

Taxes. You will pay taxes on dividends that you receive from assets held in your taxable account.
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hoppy08520
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Re: Reinvest Dividends or Use those Funds to Rebalance?

Post by hoppy08520 »

livesoft wrote:Taxes. You will pay taxes on dividends that you receive from assets held in your taxable account.
Of course! Thank you.
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