Any safer way to exploit high stock dividends?

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Any safer way to exploit high stock dividends?

Postby DennisRoche » Sun Feb 14, 2010 4:33 am

Stock dividends are getting mroe and more attractive versus the low interest rates of FI. Any way to take advantage of these higher dividends while minimizing the downside in a bear market? Is there a high dividend fund that will go down less in a bear market than the S&P?
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Postby Jacobkg » Sun Feb 14, 2010 11:54 am

If so, that would certainly qualify as quite the free lunch!
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Re: Any safer way to exploit high stock dividends?

Postby YDNAL » Sun Feb 14, 2010 12:19 pm

DennisRoche wrote:Stock dividends are getting mroe and more attractive versus the low interest rates of FI. Any way to take advantage of these higher dividends while minimizing the downside in a bear market? Is there a high dividend fund that will go down less in a bear market than the S&P?
Just for discussion purposes:

Vanguard High Dividend Yield Index Fund Investor Shares (VHDYX) - SEC yield 2.69%
1 Year 30.59%
3 Year –8.07%
2008 High 1/2/2008 $20.00
2009 Low 3/5/2009 $9.07
Now 2/12/2010 $14.61
Quite a ride!

Vanguard Dividend Growth Fund (VDIGX) - SEC yield 2.19%
1 Year 26.01%
3 Year –2.29%
2008 High 5/19/2008 $15.21
2009 Low 3/9/2009 $8.88
Now 2/12/2010 $12.76
Another ride!

Vanguard 500 Index Fund Investor Shares (VFINX) - SEC yield 1.77%
1 Year 33.13%
3 Year –7.27%
2008 High 1/3/2008 $133.22
2009 Low 3/9/2009 $62.65
Now 2/12/2010 $99.25

See for yourself. :wink:
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Postby neverknow » Sun Feb 14, 2010 12:30 pm

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Last edited by neverknow on Mon Jan 17, 2011 11:31 am, edited 1 time in total.
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Re: Any safer way to exploit high stock dividends?

Postby Wagnerjb » Sun Feb 14, 2010 12:42 pm

DennisRoche wrote:Stock dividends are getting mroe and more attractive versus the low interest rates of FI. Any way to take advantage of these higher dividends while minimizing the downside in a bear market? Is there a high dividend fund that will go down less in a bear market than the S&P?


Dennis: you recently told us that your family income jumped to $190,000 per year. In that case, you are probably in a higher tax bracket and flirting with AMT, along with phase-outs of certain exemptions and deductions.

Are you looking for high dividends in a tax-protected account? If not, I would be careful with higher dividends, as you may be incurring additional tax costs with higher taxable income.

Best wishes.
Andy
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Postby DennisRoche » Sun Feb 14, 2010 10:35 pm

Yes, I expect to be AMT territory. I suppose that would weigh down any benefits of higher dividend income.
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Postby Wagnerjb » Sun Feb 14, 2010 11:38 pm

DennisRoche wrote:Yes, I expect to be AMT territory. I suppose that would weigh down any benefits of higher dividend income.


Actually, I am not sure that high dividend income will hurt you under AMT, as it is taxed at the same rate for both regular and AMT taxes. What will more likely pinch you are the phaseouts. These are mostly driven off your Adjusted Gross Income (AGI), which includes dividend income. If your AGI is above something like $180,000 you cannot contribute to a Roth IRA. At similar levels, you lose education cost deductions and credits. At similar levels, you begin to lose some of your itemized deductions. I suspect there are other phaseouts as well.

Best wishes.
Andy
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Postby jh » Sun Feb 14, 2010 11:55 pm

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Last edited by jh on Tue Mar 30, 2010 2:43 pm, edited 1 time in total.
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Postby grabiner » Mon Feb 15, 2010 12:32 am

Wagnerjb wrote:
DennisRoche wrote:Yes, I expect to be AMT territory. I suppose that would weigh down any benefits of higher dividend income.


Actually, I am not sure that high dividend income will hurt you under AMT, as it is taxed at the same rate for both regular and AMT taxes.


However, if you are in the range in which AMT exemptions phase out, qualified dividends contribute to the phaseout as well, so your marginal tax rate on qualified dividends is 22%.
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Postby DennisRoche » Mon Feb 15, 2010 6:16 am

grabiner wrote:
Wagnerjb wrote:
DennisRoche wrote:Yes, I expect to be AMT territory. I suppose that would weigh down any benefits of higher dividend income.


Actually, I am not sure that high dividend income will hurt you under AMT, as it is taxed at the same rate for both regular and AMT taxes.


However, if you are in the range in which AMT exemptions phase out, qualified dividends contribute to the phaseout as well, so your marginal tax rate on qualified dividends is 22%.


Thanks, didn't realize that. Makes the dividends less of a good deal.
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Postby DennisRoche » Mon Feb 15, 2010 6:18 am

Wagnerjb wrote:
DennisRoche wrote:Yes, I expect to be AMT territory. I suppose that would weigh down any benefits of higher dividend income.


Actually, I am not sure that high dividend income will hurt you under AMT, as it is taxed at the same rate for both regular and AMT taxes. What will more likely pinch you are the phaseouts. These are mostly driven off your Adjusted Gross Income (AGI), which includes dividend income. If your AGI is above something like $180,000 you cannot contribute to a Roth IRA. At similar levels, you lose education cost deductions and credits. At similar levels, you begin to lose some of your itemized deductions. I suspect there are other phaseouts as well.

Best wishes.


Thanks. I don't think I'll be able to contribute to a Roth. I'm hoping to be able to contribute to a traditional IRA, then convert. I'm using a 529 for the kid's education.
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Re: Any safer way to exploit high stock dividends?

Postby DennisRoche » Mon Feb 15, 2010 6:24 am

jh wrote:
DennisRoche wrote:Stock dividends are getting mroe and more attractive versus the low interest rates of FI. Any way to take advantage of these higher dividends while minimizing the downside in a bear market? Is there a high dividend fund that will go down less in a bear market than the S&P?


The div payouts for these should be more reliable than the S&P 500:

Dividend Appreciation Index
Dividend Growth Fund
Utilities ETF XLU
Consumer Staples ETF XLP
Telecom ETF IYZ

You could also go with preferred stock ETF PFF.

EDIT: I am talking about the dividend payouts and not the share price. However, if your goal is to only withdrawal money via dividends then the share price is no longer as relevant.


Thanks very much. I'm intrigued by XLU. It's around $29 and only fell to $22 during the recent bear market. It also pays a 4.3% dividend. So if the downside is only about 25% in the short-/mid-term and you can collect a healthy dividend with more favorable tax treatment, is it an option to use XLU for fixed income until interest rates move up?
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Postby Wagnerjb » Mon Feb 15, 2010 10:15 am

grabiner wrote:However, if you are in the range in which AMT exemptions phase out, qualified dividends contribute to the phaseout as well, so your marginal tax rate on qualified dividends is 22%.


Good point David. Just another reason for a taxable investor with a higher income to minimize dividends.

Best wishes.
Andy
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