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Worried about “buying the dividend” vs Inflation/Interest

Posted: Thu Oct 31, 2019 4:30 pm
by Sabre1
Looking to make a lump sum investment. I was going to wait till next year since the last dividend payment would be non-qualified (less than 60 days till disbursement) thus being earned income. But the dividend and the amount earned in interest is not that different so taxes should be pretty similar. Was going to go with an ETF to avoid any end of year cap gains surprises. Fed tax rate is 35% before deductions. Leaning toward going ahead an investing so I can get the time in market. This is a taxable account. Thoughts?

Re: Worried about “buying the dividend” vs Inflation/Interest

Posted: Thu Oct 31, 2019 7:30 pm
by David Jay
I am no expert here (most of my portfolio is tax-advantaged). But according to the Wiki, it appears that the limitation is holding the mutual fund for more than 60 days, if you don’t sell for 61 days you are good. Link here: https://www.bogleheads.org/wiki/Non-qualified_dividends

How this applies to ETFs, I can’t say. Hopefully someone more familiar with ordinary dividends will chime in...

Re: Worried about “buying the dividend” vs Inflation/Interest

Posted: Thu Oct 31, 2019 7:32 pm
by livesoft
Invest now because "buying the dividend" is of no concern when one is 6 weeks before December & year-end distributions.

Re: Worried about “buying the dividend” vs Inflation/Interest

Posted: Fri Nov 01, 2019 9:52 pm
by grabiner
David Jay wrote:
Thu Oct 31, 2019 7:30 pm
I am no expert here (most of my portfolio is tax-advantaged). But according to the Wiki, it appears that the limitation is holding the mutual fund for more than 60 days, if you don’t sell for 61 days you are good. Link here: https://www.bogleheads.org/wiki/Non-qualified_dividends

How this applies to ETFs, I can’t say. Hopefully someone more familiar with ordinary dividends will chime in...
It's the same rule. A dividend is non-qualified to the fund if the fund held the stock for 60 days or less, and non-qualified to you (even if reported as qualified by the fund) if you held the share which paid the dividend for 60 days or less.

The normal issue with "buying the dividend" is that you avoid the tax on the dividend by waiting to buy a fund until after the dividend is paid. But a typical quarterly stock mutual fund dividend is 0.5%, mostly qualified, for a tax bill of 0.08%, or $80 on a $100K investment; you expect to lose more than that by staying out of the market for a week.

If your fund is making an unusually large distribution in December (such as a large capital gain), then it would be worth waiting, but funds which do this should not be held in taxable accounts. If the fund distributes yearly dividends, waiting a few weeks to avoid a distribution may also be worthwhile, but even then, I wouldn't wait more than a month.