Not buying the dividend sanity check

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Murray Boyd
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Not buying the dividend sanity check

Post by Murray Boyd » Wed Nov 28, 2012 2:40 pm

It's time to rebalance and I've got to buy a few funds in my taxable account. To be safe I thought I'd check with the Bogleheads. Here's what I need to buy: TSM, Tax-Managed International, and Emerging Markets. It seems like they've all switched to quarterly dividends. Is it alright to buy now? Thanks!

Grt2bOutdoors
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Re: Not buying the dividend sanity check

Post by Grt2bOutdoors » Wed Nov 28, 2012 4:06 pm

Murray Boyd wrote:It's time to rebalance and I've got to buy a few funds in my taxable account. To be safe I thought I'd check with the Bogleheads. Here's what I need to buy: TSM, Tax-Managed International, and Emerging Markets. It seems like they've all switched to quarterly dividends. Is it alright to buy now? Thanks!
Anytime is okay. But the question is: do you feel like paying taxes on dividends received in about 30 days? Is the amount of dividend to be received substantial enough to make you change course or wait unitl after the distribution?
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House Blend
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Re: Not buying the dividend sanity check

Post by House Blend » Wed Nov 28, 2012 6:07 pm

Murray,

Your meaning of "rebalance" is a little unclear to me.

That is, usually it means moving a pile of money from one asset class to another. So if one can do it in tax-advantaged, one does it there. Otherwise, if it has to be in taxable, it means selling Fund A and buying Fund B. In that case, especially if Funds A and B have the same dividend date, you aren't buying a dividend at all; you are simply trading one dividend for another.

The usual not-buying-the-dividend problem is when you have a lump of cash on the sidelines waiting to be invested.

Assume this lump is earning 0% interest. And assume it is destined for TSM, which is about to pay a dividend of 0.5% in 3 weeks time. If you buy now, you'll pay a 0.005*0.15 = 7.5bp tax (+state tax) on that sum. The alternative is to wait 3 weeks and hope the market drops, or increases by less than 7.5bp in that time.

BTW: a constant growth rate of 7.5bp per 3 weeks is 1.3% annualized.

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Murray Boyd
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Re: Not buying the dividend sanity check

Post by Murray Boyd » Wed Nov 28, 2012 10:09 pm

Yep, lump of money.

I was just checking in case there was something I didn't know about, like, "This year EM a big distribution because of mumble mumble mumble."

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grabiner
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Re: Not buying the dividend sanity check

Post by grabiner » Wed Nov 28, 2012 10:24 pm

Murray Boyd wrote:It's time to rebalance and I've got to buy a few funds in my taxable account. To be safe I thought I'd check with the Bogleheads. Here's what I need to buy: TSM, Tax-Managed International, and Emerging Markets. It seems like they've all switched to quarterly dividends. Is it alright to buy now? Thanks!
The tax on the dividend is so low with these funds that you'll probably come out ahead if you buy a week before the dividend date rather than leaving the money in cash. The tax on a 2% yield with quarterly dividends, all qualified, is 0.08% on the 0.5% dividend. TM International is even better as it has 100% qualified dividends and you get 7% back from the foreign tax credit. Emerging Markets may have only 60% qualified dividends but also has a foreign tax credit.
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Re: Not buying the dividend sanity check

Post by livesoft » Wed Nov 28, 2012 10:28 pm

With new announcements daily of chunky dividends, I'll bet the projected dividend will gradually rise over the next few weeks.

That said, I would only worry about this about a week before the ex-Dividend date.
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grabiner
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Re: Not buying the dividend sanity check

Post by grabiner » Wed Nov 28, 2012 10:31 pm

Murray Boyd wrote:Yep, lump of money.

I was just checking in case there was something I didn't know about, like, "This year EM a big distribution because of mumble mumble mumble."
And that is a legitimate concern, since Emerging Markets Index changed indexes and the new index does not include South Korea. However, the fund has enough realized losses (5% of NAV as of 10/31, and only 6% realized gains in the whole portfolio) that it can sell its entire South Korea holding without realizing a gain.
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