Dividend Misunderstandings & Only Spend Return

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snarlyjack
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Re: Dividend Misunderstandings & Only Spend Return

Post by snarlyjack » Sat Jul 08, 2017 8:46 pm

Edge,

The problem statement is (really) why invest in a
dividend paying fund?

1). What possible reasons why a person would invest in a dividend fund
when their suboptimal? Suboptimal is questionable...
2). I was just giving my reasons.

Dead Man Walking
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Re: Dividend Misunderstandings & Only Spend Return

Post by Dead Man Walking » Sun Jul 09, 2017 11:47 pm

A major point in the dividend debate is the fact that dividends are taxed at a higher rate than capital gains. Most people think that the money will be better spent by the taxpayers than the government. I think that some investors believe that they will spend the profits better than the folks who run the company hence they want to share the profits. This desire for dividends may be driven by the exorbitant compensation paid to company executives. Bogle addressed the disparity between worker compensation and executive compensation in The Battle for the Soul of Capitalism. This is an example of the behavioral aspect of investing.

Since I invest in mutual funds, I realize that I'm invested in companies that pay dividends and companies that do not. Consequently, I will have to pay taxes on both dividends and capital gains. Death and taxes - unpleasant and unavoidable aspects of the human condition.

DMW

naha66
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Re: Dividend Misunderstandings & Only Spend Return

Post by naha66 » Mon Jul 10, 2017 9:32 am

Dead Man Walking wrote:A major point in the dividend debate is the fact that dividends are taxed at a higher rate than capital gains. Most people think that the money will be better spent by the taxpayers than the government. I think that some investors believe that they will spend the profits better than the folks who run the company hence they want to share the profits. This desire for dividends may be driven by the exorbitant compensation paid to company executives. Bogle addressed the disparity between worker compensation and executive compensation in The Battle for the Soul of Capitalism. This is an example of the behavioral aspect of investing.

Since I invest in mutual funds, I realize that I'm invested in companies that pay dividends and companies that do not. Consequently, I will have to pay taxes on both dividends and capital gains. Death and taxes - unpleasant and unavoidable aspects of the human condition.

DMW
Not everybody is taxed at a higher rate on dividends, maybe you but not me. If i could have a $100 dollars every time i hear or read that statement then maybe it might be true. Too many people on this mess board live in a bubble. If you in the 15% or less tax bracket its the same.

onourway
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Re: Dividend Misunderstandings & Only Spend Return

Post by onourway » Mon Jul 10, 2017 9:37 am

naha66 wrote: Not everybody is taxed at a higher rate on dividends, maybe you but not me. If i could have a $100 dollars every time i hear or read that statement then maybe it might be true. Too many people on this mess board live in a bubble. If you in the 15% or less tax bracket its the same.
Even if your tax rate is the same between the two, the dividend tax is effectively higher because the basis on which the tax applies is smaller when calculating capital gains.

dbr
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Re: Dividend Misunderstandings & Only Spend Return

Post by dbr » Mon Jul 10, 2017 9:39 am

naha66 wrote: DMW
Not everybody is taxed at a higher rate on dividends, maybe you but not me. If i could have a $100 dollars every time i hear or read that statement then maybe it might be true. Too many people on this mess board live in a bubble. If you in the 15% or less tax bracket its the same.[/quote]

You are absolutely right that tax cost is a result of individual circumstances. There probably are too many generalizations made about things like this.

However, one point you may be missing is that when shares are sold not all of the principal liquidated is capital gain and hence the tax rate is not applied to all of the proceeds. There could even be a capital loss. Another factor about capital gains is that they may never be taxed if the position is liquidated just after being inherited with basis step-up.

The right thing to do is consider one's personal situation.

snarlyjack
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Re: Dividend Misunderstandings & Only Spend Return

Post by snarlyjack » Mon Jul 10, 2017 11:57 am

dbr & others,

Here is my plan...

Being a young guy. What would happen if I never sold the portfolio &
just lived off of the dividends and passed it down to my kids/charity at death someday?

$1.0 million x 3% = $30,000 per year.
$2.0 million x 3% = $60,000 per year.
$3.0 million x 3% = $90,000 per year.
etc...

Without ever touching the principal, using only dividends...
Does that sound like a good workable plan?

dbr
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Re: Dividend Misunderstandings & Only Spend Return

Post by dbr » Mon Jul 10, 2017 12:04 pm

snarlyjack wrote:dbr,

Here is my plan...

Being a young guy. What would happen if I never sold the portfolio &
just lived off of the dividends and passed it down to my kids/charity at death someday.

$1.0 million x 3% = $30,000 per year.
$2.0 million x 3% = $60,000 per year.
$3.0 million x 3% = $90,000 per year.
etc...

Without ever touching the principal, using only dividends...
Does that sound like a good workable plan?
You still completely do not understand the concepts of dividends. return, and "never selling the portfolio."

On the other hand the plan you put forth is to make fixed (hopefully inflation indexed starting with 3% of the initial portfolio) withdrawals from some nest egg you have managed to save. That is a conventional safe withdrawal scenario at a conservative rate. This has nothing whatsoever to do with dividends other than the awkward and difficult finagling to engineer and annually re-engineer your holdings to deliver exactly the dividends you need. If you can get more than 3% dividends from an otherwise efficient and balanced portfolio it becomes easier because you can reinvest the excess and don't have to do so much finagling. I think everyone should have some fraction of income annuitized, but SS may be enough to fill that role.

zuma
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Re: Dividend Misunderstandings & Only Spend Return

Post by zuma » Mon Jul 10, 2017 12:12 pm

snarlyjack wrote:dbr & others,

Here is my plan...

Being a young guy. What would happen if I never sold the portfolio &
just lived off of the dividends and passed it down to my kids/charity at death someday?

$1.0 million x 3% = $30,000 per year.
$2.0 million x 3% = $60,000 per year.
$3.0 million x 3% = $90,000 per year.
etc...

Without ever touching the principal, using only dividends...
Does that sound like a good workable plan?
"Selling the portfolio" to generate income and taking dividends as cash are not fundamentally different types of activities. That is the whole point of this thread.

Bfwolf
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Re: Dividend Misunderstandings & Only Spend Return

Post by Bfwolf » Mon Jul 10, 2017 12:20 pm

snarlyjack wrote:dbr & others,

Here is my plan...

Being a young guy. What would happen if I never sold the portfolio &
just lived off of the dividends and passed it down to my kids/charity at death someday?

$1.0 million x 3% = $30,000 per year.
$2.0 million x 3% = $60,000 per year.
$3.0 million x 3% = $90,000 per year.
etc...

Without ever touching the principal, using only dividends...
Does that sound like a good workable plan?
Is this a good, workable plan? Well, it has a couple of pros:

1) You'll probably leave a significantly appreciated portfolio to your heirs

2) It's mindless (i.e. you don't have to take any action to get your returns, you just cash the dividend checks).

It has a number of cons:

1) The amount of money you get each year will vary significantly. Dividend yields aren't stable, which will affect how much you get each year, and capital gains will change your base so that even if the dividend yield % was stable, you'd get a different amount each year. So if you were trying to use this to offset predictable expenses, it won't be great.

2) You'd be more diversified and better off getting a total stock market fund which has a lower yield and then selling shares every quarter to make up the difference in yield between the total stock fund and the high dividend fund. Though even better than this might be withdrawing a set amount (dividends + capital gains) in year 1 and increasing for inflation so it can offset predictable expenses, with perhaps some modest reductions in bad stock years and increases in good stock years.

3) A little bit of money in bonds could help provide more stability.

You seem to be really married psychologically to this idea of a high dividend yield portfolio and then living off the dividends, despite about 10 different people explaining why this is sub-optimal. But then you keep coming back and suggesting the same thing. So at this point, I kind of feel like you want to believe what you want to believe.
Last edited by Bfwolf on Mon Jul 10, 2017 12:22 pm, edited 1 time in total.

snarlyjack
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Re: Dividend Misunderstandings & Only Spend Return

Post by snarlyjack » Mon Jul 10, 2017 12:21 pm

I know...never say never...

Last night I went through the stock holding of VHDYX.
These big blue chip stocks have been around for years &
are going to be around for years to come. They employ
millions of people. Now they might have their up & downs
but I don't see them going anywhere. VHDYX is a pretty
sweet little fund. Vanguard did a excellent job with it!

I don't see a reason why a person could not live off of that fund
for years to come.

Grt2bOutdoors
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Re: Dividend Misunderstandings & Only Spend Return

Post by Grt2bOutdoors » Mon Jul 10, 2017 12:28 pm

snarlyjack wrote:I know...never say never...

Last night I went through the stock holding of VHDYX.
These big blue chip stocks have been around for years &
are going to be around for years to come. They employ
millions of people. Now they might have their up & downs
but I don't see them going anywhere. VHDYX is a pretty
sweet little fund. Vanguard did a excellent job with it!

I don't see a reason why a person could not live off of that fund
for years to come.
Companies come and go, dividend yields rise and fall. Let us know how it all turns out.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Bfwolf
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Re: Dividend Misunderstandings & Only Spend Return

Post by Bfwolf » Mon Jul 10, 2017 12:31 pm

snarlyjack wrote:I know...never say never...

Last night I went through the stock holding of VHDYX.
These big blue chip stocks have been around for years &
are going to be around for years to come. They employ
millions of people. Now they might have their up & downs
but I don't see them going anywhere. VHDYX is a pretty
sweet little fund. Vanguard did a excellent job with it!

I don't see a reason why a person could not live off of that fund
for years to come.
Well, it's an index fund so Vanguard didn't really "do" much of anything with it, except choose the benchmark they wanted to mimic (the FTSE High Dividend Yield Index).

It's a fairly diversified fund so you could certainly do worse, but by choosing it rather than the Total Stock Market Index, you have made a bet on certain sectors that are over-weighted by this fund vs the total market: consumer goods, oil & gas, telecommunications, and utilities. You have made a bet against other sectors that are under-weighted by this fund: consumer services, financials, and technology. So you are essentially stating that you know better than the marketplace which sectors will outperform in the future. Do you have any reason to think you are better at forecasting stock performance than the professionals who do this for a living?

You need to let go of your preconceived notions of how the stock market works and how dividends work. I highly encourage you to go read the Bogleheads Guide to Investing.

onourway
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Re: Dividend Misunderstandings & Only Spend Return

Post by onourway » Mon Jul 10, 2017 12:43 pm

snarlyjack wrote:I know...never say never...

Last night I went through the stock holding of VHDYX.
These big blue chip stocks have been around for years &
are going to be around for years to come. They employ
millions of people. Now they might have their up & downs
but I don't see them going anywhere. VHDYX is a pretty
sweet little fund. Vanguard did a excellent job with it!

I don't see a reason why a person could not live off of that fund
for years to come.
Things change. A lot more than you might expect.

The ten largest holdings in VHDYX are:

1 Microsoft Corp.
2 Johnson & Johnson
3 Exxon Mobil Corp.
4 JPMorgan Chase & Co.
5 Wells Fargo & Co.
6 General Electric Co.
7 AT&T Inc.
8 Procter & Gamble Co.
9 Pfizer Inc.
10 Chevron Corp.

20 years ago the 10 highest dividend paying stocks were:

1 Philip Morris
2 Morgan (J.P.)
3 Texaco
4 Chevron
5 Exxon
6 AT&T
7 General Motors
8 International Paper
9 DuPont
10 Minnesota Mining & Manufacturing

To look back to 30 years I will move to the component companies of the DJIA. This is what it looked like in 1987:


Allied-Signal Incorporated
Eastman Kodak Company
Navistar International Corporation † (formerly International Harvester Company)
Aluminum Company of America
Exxon Corporation
Philip Morris Companies Inc.
American Can Company
General Electric Company
The Procter & Gamble Company
American Express Company
General Motors Corporation
Sears Roebuck & Company
American Telephone and Telegraph Company
Goodyear Tire and Rubber Company
Texaco Incorporated
Bethlehem Steel Corporation
International Business Machines Corporation
Union Carbide Corporation
The Boeing Company ↑
International Paper Company
United Technologies Corporation
Chevron Corporation
McDonald’s Corporation
USX Corporation †(formerly United States Steel Corporation)
The Coca-Cola Company ↑
Merck & Co., Inc.
Westinghouse Electric Corporation
E.I. du Pont de Nemours & Company
Minnesota Mining & Manufacturing Company
F. W. Woolworth Company

Plenty of names you recognize in there, but a whole bunch more that are no longer with us. What do you think has fared better over the past 30 years? A fund of those 30 'blue-chip', dividend paying companies, or an index that captures the entire market? This is a common fallacy of dividend chasers - that these are big companies that aren't going anywhere. A quick look at the history of the Dow proves this to be false. Most people who sing the praises of dividends are being mightily misled by a severe case of survivorship bias.

snarlyjack
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Re: Dividend Misunderstandings & Only Spend Return

Post by snarlyjack » Mon Jul 10, 2017 1:01 pm

You guy's are good & it's much appreciated...thank you for the great conversation!
(getting into the weeds of this whole thing).

As I see it the Total Stock Market is a very good fund!
With 3600 stocks...but a lot of these companies are small,
medium companies that are never going to do anything.
They rise & fall with the tide of the stock market. A lot
of these stocks would be classified... speculation stocks.

High Dividend yield Fund is 420 big blue chip stocks with
wide moats that have been around for years. They have a
competitive advantage over small & medium sized stocks.

I realize that companies rise & fall...but what we all have in
common is we believe in index funds & Vanguard. I think a
index fund is self cleaning. As 1 company falls another
company rises.

Wakefield1
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Re: Dividend Misunderstandings & Only Spend Return

Post by Wakefield1 » Mon Jul 10, 2017 1:05 pm

snarlyjack wrote:You guy's are good & it's much appreciated...thank you for the great conversation!
(getting into the weeds of this whole thing).

As I see it the Total Stock Market is a very good fund!
With 3600 stocks...but a lot of these companies are small,
medium companies that are never going to do anything.
They rise & fall with the tide of the stock market. A lot
of these stocks would be classified... speculation stocks.

High Dividend yield Fund is 420 big blue chip stocks with
wide moats that have been around for years. They have a
competitive advantage over small & medium sized stocks.

I realize that companies rise & fall...but what we all have in
common is we believe in index funds & Vanguard. I think a
index fund is self cleaning. As 1 company falls another
company rises.
Some of these now speculation stocks someday will be paying dividends.

Bfwolf
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Re: Dividend Misunderstandings & Only Spend Return

Post by Bfwolf » Mon Jul 10, 2017 1:09 pm

snarlyjack wrote:You guy's are good & it's much appreciated...thank you for the great conversation!
(getting into the weeds of this whole thing).

As I see it the Total Stock Market is a very good fund!
With 3600 stocks...but a lot of these companies are small,
medium companies that are never going to do anything.
They rise & fall with the tide of the stock market. A lot
of these stocks would be classified... speculation stocks.

High Dividend yield Fund is 420 big blue chip stocks with
wide moats that have been around for years. They have a
competitive advantage over small & medium sized stocks.

I realize that companies rise & fall...but what we all have in
common is we believe in index funds & Vanguard. I think a
index fund is self cleaning. As 1 company falls another
company rises.
There are, as you point out, thousands of smaller companies in the Total Stock Market index, and many of them are not going to do anything. But some of them are going to do TREMENDOUS things, and that's where a lot of the growth in the stock market comes from.

Big companies may have wide moats and established brands, but none of this is information that's only privy to you. Every investor knows it, and this is baked into their stock price.

As far as this idea of "self cleaning," in the Total Stock Market Index, you own all the companies that both rise and fall so I guess it is "self cleaning." With a High Dividend yield fund, you do not. Consider Microsoft, your #1 holding in your High Dividend yield fund. For many years, and during its meteoric stock climb, Microsoft paid no dividend and would not have been owned by your fund. You would've only bought Microsoft AFTER it had picked up its largest stock market gains.

snarlyjack
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Re: Dividend Misunderstandings & Only Spend Return

Post by snarlyjack » Mon Jul 10, 2017 1:26 pm

Going full circle...

I' am sitting back in the weeds getting dividends &
compounding out. The Total Stock Market & S & P 500
have only outperformed High Dividend Yield by a hair in
the past 4 years. What about the next 80 years?

Now the optimum might be (1) add a bond fund, to make
it 80/20. (2) add Total Stock Market, to pick up a lot
of the stocks I don't have. Something like 60/20/20.
High Dividend Yield = 60%
Total Stock Market = 20%
Total Bond Fund = 20%

What do you think of this plan?

Bfwolf
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Re: Dividend Misunderstandings & Only Spend Return

Post by Bfwolf » Mon Jul 10, 2017 1:35 pm

snarlyjack wrote:Going full circle...

I' am sitting back in the weeds getting dividends &
compounding out. The Total Stock Market & S & P 500
have only outperformed High Dividend Yield by a hair in
the past 4 years. What about the next 80 years?

Now the optimum might be (1) add a bond fund, to make
it 80/20. (2) add Total Stock Market, to pick up a lot
of the stocks I don't have. Something like 60/20/20.
High Dividend Yield = 60%
Total Stock Market = 20%
Total Bond Fund = 20%

What do you think of this plan?
I think you'd be better off with 80% Total Stock Market and 20% Total Bond Fund.

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patrick013
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Re: Dividend Misunderstandings & Only Spend Return

Post by patrick013 » Mon Jul 10, 2017 2:17 pm

The arguments I've heard against a dividend tilt are rather
subjective and even after taxes reduce the total return of
a long term dividend investment the dividend funds still beat
funds like TSM over all ten year periods I've seen.

Pricing is truly a balancing act as growth, yield, bond yields,
and earnings providing input. With low growth they can be priced
as BBB bonds in some markets while yield, price growth, and total
return remain competitive with the market portfolios. And with
lower beta in most cases. So with the market pricing these as
excellent value stocks including the dividend investors have the
option to spend dividends or reinvest. Most of these dividend
indexes only include stocks that are already in some index.

Rising interest rates in the market can hurt dividend stocks as
higher yielding bonds have better safety perceptions, lower sales
can hurt the entire market, and borrowing costs can reduce funds
available for dividends in a high payout company, etc., etc., etc..

Funds like NOBL are expected to do well with rising interest rates
as they have a growth and profitability/payout factor built-in while
funds like SPHD and SPYD come closer to replicating the successful
method of selection in a well known study, and should do well in
constant rate markets. Dividend funds would have to be better in a
Roth tax-wise. I said before I'd invest 10%.

Just MHO.

SPHD - Product Detail
age in bonds, buy-and-hold, 10 year business cycle

onourway
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Re: Dividend Misunderstandings & Only Spend Return

Post by onourway » Mon Jul 10, 2017 2:37 pm

patrick013 wrote:The arguments I've heard against a dividend tilt are rather
subjective and even after taxes reduce the total return of
a long term dividend investment the dividend funds still beat
funds like TSM over all ten year periods I've seen.
Can you tell me more about these dividend funds that have historically always outpaced TSM? Will they continue to do so in the future?

FactualFran
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Re: Dividend Misunderstandings & Only Spend Return

Post by FactualFran » Mon Jul 10, 2017 2:38 pm

snarlyjack wrote:I don't see a reason why a person could not live off of that fund for years to come.
Decades ago Vanguard had a High Yield Stock Fund. It was actively managed by a very highly regarded fund manager. However, its total return for 1990 was wretched. In 1991 the fund was merged out of existence (warning: correlation does not necessarily indicate causation).

Just because an equity fund has a high yield does not mean that it will be more successful over the long-term as a source of money than lower yielding funds.

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patrick013
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Re: Dividend Misunderstandings & Only Spend Return

Post by patrick013 » Mon Jul 10, 2017 3:03 pm

onourway wrote:
patrick013 wrote:The arguments I've heard against a dividend tilt are rather
subjective and even after taxes reduce the total return of
a long term dividend investment the dividend funds still beat
funds like TSM over all ten year periods I've seen.
Can you tell me more about these dividend funds that have historically always outpaced TSM? Will they continue to do so in the future?
http://myphotos.mypclinuxos.com/images/ ... ne2017.png
also,
Re: nice short piece on the math of factor investing
age in bonds, buy-and-hold, 10 year business cycle

dbr
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Re: Dividend Misunderstandings & Only Spend Return

Post by dbr » Mon Jul 10, 2017 3:08 pm

patrick013 wrote:
onourway wrote:
patrick013 wrote:The arguments I've heard against a dividend tilt are rather
subjective and even after taxes reduce the total return of
a long term dividend investment the dividend funds still beat
funds like TSM over all ten year periods I've seen.
Can you tell me more about these dividend funds that have historically always outpaced TSM? Will they continue to do so in the future?
http://myphotos.mypclinuxos.com/images/ ... ne2017.png
also,
Re: nice short piece on the math of factor investing
Let's be very clear that a legitimate study of risk and return sorted on various subsets of assets is an entirely different proposal than the various versions of dividends are free money with no understanding of risk and return that plague those discussions. The legitimate discussion such as above can stand on its own merits. FWIW Larry Swedroe has written extensively on this subject: https://www.google.com/#q=swedroe+dividend+stocks

Nate79
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Re: Dividend Misunderstandings & Only Spend Return

Post by Nate79 » Mon Jul 10, 2017 3:42 pm

patrick013 wrote:
onourway wrote:
patrick013 wrote:The arguments I've heard against a dividend tilt are rather
subjective and even after taxes reduce the total return of
a long term dividend investment the dividend funds still beat
funds like TSM over all ten year periods I've seen.
Can you tell me more about these dividend funds that have historically always outpaced TSM? Will they continue to do so in the future?
http://myphotos.mypclinuxos.com/images/ ... ne2017.png
also,
Re: nice short piece on the math of factor investing
Can you give an actual fund ticker symbol that is a high dividend fund and that has outperformed TSM over X year period (5, 10, 15, 20, etc)?

trueblueky
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Re: Dividend Misunderstandings & Only Spend Return

Post by trueblueky » Mon Jul 10, 2017 3:52 pm

dbr wrote:
naha66 wrote: DMW
Not everybody is taxed at a higher rate on dividends, maybe you but not me. If i could have a $100 dollars every time i hear or read that statement then maybe it might be true. Too many people on this mess board live in a bubble. If you in the 15% or less tax bracket its the same.
You are absolutely right that tax cost is a result of individual circumstances. There probably are too many generalizations made about things like this.

However, one point you may be missing is that when shares are sold not all of the principal liquidated is capital gain and hence the tax rate is not applied to all of the proceeds. There could even be a capital loss. Another factor about capital gains is that they may never be taxed if the position is liquidated just after being inherited with basis step-up.

The right thing to do is consider one's personal situation.
I don't understand how this works in all cases.
Case: 100 shares of XYZ at $100 each. 2% dividend. Taxable account. If reinvested, there are now 102+ shares at $98 each. Must include the dividend when filing taxes. Tax impact is different for different people. Zero for some.

How does it make any difference whether the dividend is reinvested in XYZ or in another company? Only if the dividend is spent is there less invested.

I think there's a mix of questions:
* whether it is good for companies to pay dividends
* whether it is good to preferentially buy dividend company stock
* whether it is good tax practice to take dividends
* whether it is good to rely on dividends for income vs total return

On the last, I agree Total Return.

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patrick013
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Re: Dividend Misunderstandings & Only Spend Return

Post by patrick013 » Mon Jul 10, 2017 4:04 pm

Nate79 wrote:
patrick013 wrote:
onourway wrote:
patrick013 wrote:The arguments I've heard against a dividend tilt are rather
subjective and even after taxes reduce the total return of
a long term dividend investment the dividend funds still beat
funds like TSM over all ten year periods I've seen.
Can you tell me more about these dividend funds that have historically always outpaced TSM? Will they continue to do so in the future?
http://myphotos.mypclinuxos.com/images/ ... ne2017.png
also,
Re: nice short piece on the math of factor investing
Can you give an actual fund ticker symbol that is a high dividend fund and that has outperformed TSM over X year period (5, 10, 15, 20, etc)?
I don't think there is one that goes back that long in existence. There's a
Morningstar study that goes back to 1960 I think and the O’Shaughnessy study
back to 1951, and then the DOW/S&P indices that are slowly becoming ETF's
like ticker SPHD. None of the ETF's today exactly replicate the "indexes"
used in the 2 studies. VYM and many others do not. Statistically, they should
perform in a similar manner return wise if they existed exactly today as they
did in the studies. So the only evidence that goes that far back is the published
results of the 2 studies. Believe it or not. One uses an old compustat database
and the other uses a French maintained database. One can only believe they are
accurate. Morningstar has high reliability in it's research and the O’Shaughnessy
study appears well done. Both beat the 500 and/or market portfolios thru the time
periods in question. Until another study surfaces that's all that's known today.
age in bonds, buy-and-hold, 10 year business cycle

snarlyjack
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Re: Dividend Misunderstandings & Only Spend Return

Post by snarlyjack » Mon Jul 10, 2017 4:35 pm

And were back in the weeds again...

Here is a study that Professor Jeremy Siegal
did comparing the S & P 500 to High Dividend Yield stocks.
1957 thru 2002 "The Future For Investors".

http://www.mhinvest.com/files/pdf/NF_fu ... s_2005.pdf

Thanks for your studies Patrick...they were interesting & informative.

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DonCamillo
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Re: Dividend Misunderstandings & Only Spend Return

Post by DonCamillo » Mon Jul 10, 2017 5:08 pm

I like dividends on a (relatively small) portion of my investments.

I used to collect dividend paying stocks. I saw that as an alternative to collecting beer cans, corvettes, impressionist paintings, stamps, Matchbox cars or vacation homes. My preference was to buy stocks that I would see often in my daily life (such as Waste Management and Sysco trucks on the highway, or CSX trains) and to buy enough of each stock to pay me about $2,000 a year (roughly $5 a day) in dividends. It is fun to see a train go by and think that it is paying me $5 a day. For a while, I used the dividends to buy other dividend stocks, but now that I am retired, I just let the dividends stack up in my brokerage account, and then take a vacation with the money.

I retired on January 1st of this year. Since then I have been to Mexico, Costa Rica, Nicaragua, Panama, Columbia, Aruba, Portugal, Sweden, Norway, Netherlands, Poland, Lithuania, Latvia, Estonia, Finland, and Iceland, with upcoming trips back to Portugal, Morocco, the Canary Islands and St. Marten. Most of the money I remove from my portfolio is interest and dividends. Part of my reason is that money is going to be taxed anyway, so I can spend it without creating another taxable event. I do some tax-loss harvesting as well to offset capital gains plus $3,000 each year.

But I also monitor my portfolio to ensure that it continues to grow in retirement. If the market takes a turn for the worse, I will reinvest more of the dividends and interest. I live on pensions and social security. I play with dividends and interest. I think of only spending returns as a harmless game. But I also realize that I was very fortunate that I could work into my 70s and save most of my income until then. If I had retired at 62, I would be struggling to pay my bills. If I had retired at 66, I would be comfortable, but would be living on half my current income.
Last edited by DonCamillo on Mon Jul 10, 2017 5:13 pm, edited 1 time in total.
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Re: Dividend Misunderstandings & Only Spend Return

Post by patrick013 » Mon Jul 10, 2017 5:11 pm

snarlyjack wrote:And were back in the weeds again...

Here is a study that Professor Jeremy Siegal
did comparing the S & P 500 to High Dividend Yield stocks.
1957 thru 2002 "The Future For Investors".

http://www.mhinvest.com/files/pdf/NF_fu ... s_2005.pdf

Thanks for your studies Patrick...they were interesting & informative.
Well that's 3 studies with excellent returns. The Morningstar study uses
the 30% highest dividend size, The Siegel study uses 20% highest yielders,
and the O’Shaughnessy study uses the 50 highest yield large cap stocks.

Thanks for the copy.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Dividend Misunderstandings & Only Spend Return

Post by snarlyjack » Mon Jul 10, 2017 9:45 pm

Here is the updated study from Professor Jeremy Siegal
going through 1957 thru 2012. The results are fairly current,
with 55 years of analysis.

You must keep in mind that the High Dividend Yield Index Fund
is NOT the same screening or analysis as Professor Jeremy Siegal study.
But it does a % comparison with the S & P 500. Interesting study
none the less...

http://thereformedbroker.com/2012/06/07 ... st-always/

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Re: Dividend Misunderstandings & Only Spend Return

Post by ThereAreNoGurus » Mon Jul 10, 2017 10:47 pm

zuma wrote: I believed this common misunderstanding about dividends for most of my investing life. Thankfully, I found the Bogleheads forum a couple years ago and learned about total return.

Like many people, I assumed that dividends were something like interest payments. The idea that taking dividends is fundamentally not different from selling shares feels deeply counterintuitive. It took quite a bit of reading to fully unlearn what I had previously believed was true.
Until the internet came along, I assumed the majority of retail investors understood dividends were not the same as interest payments. Now, especially after hanging around this forum, I'd ***guess*** at least 50 percent of retail investors don't understand this.

When I was in jr high or high school, I wondered why don't investors buy a stock the day before its dividend... easy money, right? (Granted, weird kid, now weird adult.) But looking at the stock tables (yep... dating myself), it was easy to see that the opening stock price was reduced by the dividend payment... alas no free lunch. So I simply assumed most investors knew this.

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Re: Dividend Misunderstandings & Only Spend Return

Post by edge » Mon Jul 10, 2017 11:33 pm

It makes no sense to invest in a dividend focused fund just because of the dividends. Dividends are a proxy for value and there are better metrics to achieve this e.g. P/B. You see out-performance but you don't understand why. Avoiding dividends is a waste of time also. They are what they are.

ThereAreNoGurus - it is probably more like 95%.
snarlyjack wrote:Edge,

The problem statement is (really) why invest in a
dividend paying fund?

1). What possible reasons why a person would invest in a dividend fund
when their suboptimal? Suboptimal is questionable...
2). I was just giving my reasons.

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Re: Dividend Misunderstandings & Only Spend Return

Post by Longtermgrowth » Mon Jul 10, 2017 11:53 pm

snarlyjack wrote:Here is the updated study from Professor Jeremy Siegal
going through 1957 thru 2012. The results are fairly current,
with 55 years of analysis.

You must keep in mind that the High Dividend Yield Index Fund
is NOT the same screening or analysis as Professor Jeremy Siegal study.
But it does a % comparison with the S & P 500. Interesting study
none the less...

http://thereformedbroker.com/2012/06/07 ... st-always/
I like WisdomTree's dividend weighting methodology. I hold three of their ETFs for global small cap value exposure. For domestic large cap value, VYM (Vanguard High Dividend Yield ETF) along with some SCHD (Schwab US Dividend Equity ETF) have me happy.

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Re: Dividend Misunderstandings & Only Spend Return

Post by snarlyjack » Tue Jul 11, 2017 10:04 pm

Here is another interesting article/video from
Professor Jeremy Siegel. About 1 year old.

"Were in the first inning of dividend stock investing".

For assorted reasons...cd's & bond yield's just are not high enough
to depend on the income. Prof. Jeremy Siegel thinks were going back
to the 1950's & 1960's where people bought stocks for income/dividends.

Who knows? ...enjoy...

http://www.cnbc.com/2016/05/25/siegel-w ... tocks.html

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Re: Dividend Misunderstandings & Only Spend Return

Post by ThereAreNoGurus » Tue Jul 11, 2017 11:25 pm

edge wrote:It makes no sense to invest in a dividend focused fund just because of the dividends. Dividends are a proxy for value and there are better metrics to achieve this e.g. P/B. You see out-performance but you don't understand why. Avoiding dividends is a waste of time also. They are what they are.

ThereAreNoGurus - it is probably more like 95%.
Haha... you could be right!

I'm going to ask the few folks I know, who buy individual stocks, whether they realize a dividend does not result in an increase of principal.

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Re: Dividend Misunderstandings & Only Spend Return

Post by zuma » Wed Jul 12, 2017 2:19 am

snarlyjack wrote:Here is another interesting article/video from
Professor Jeremy Siegel. About 1 year old.

"Were in the first inning of dividend stock investing".
I have no idea what that means.

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Re: Dividend Misunderstandings & Only Spend Return

Post by Grt2bOutdoors » Wed Jul 12, 2017 6:42 am

DonCamillo wrote:I like dividends on a (relatively small) portion of my investments.

I used to collect dividend paying stocks. I saw that as an alternative to collecting beer cans, corvettes, impressionist paintings, stamps, Matchbox cars or vacation homes. My preference was to buy stocks that I would see often in my daily life (such as Waste Management and Sysco trucks on the highway, or CSX trains) and to buy enough of each stock to pay me about $2,000 a year (roughly $5 a day) in dividends. It is fun to see a train go by and think that it is paying me $5 a day. For a while, I used the dividends to buy other dividend stocks, but now that I am retired, I just let the dividends stack up in my brokerage account, and then take a vacation with the money.

I retired on January 1st of this year. Since then I have been to Mexico, Costa Rica, Nicaragua, Panama, Columbia, Aruba, Portugal, Sweden, Norway, Netherlands, Poland, Lithuania, Latvia, Estonia, Finland, and Iceland, with upcoming trips back to Portugal, Morocco, the Canary Islands and St. Marten. Most of the money I remove from my portfolio is interest and dividends. Part of my reason is that money is going to be taxed anyway, so I can spend it without creating another taxable event. I do some tax-loss harvesting as well to offset capital gains plus $3,000 each year.

But I also monitor my portfolio to ensure that it continues to grow in retirement. If the market takes a turn for the worse, I will reinvest more of the dividends and interest. I live on pensions and social security. I play with dividends and interest. I think of only spending returns as a harmless game. But I also realize that I was very fortunate that I could work into my 70s and save most of my income until then. If I had retired at 62, I would be struggling to pay my bills. If I had retired at 66, I would be comfortable, but would be living on half my current income.
It's likely you bought those equities when they were considered small or midcaps, not the large caps they are now. Also likely you purchased them at much lower prices than today. Anyone purchasing individual equities has better be aware of all the risks, you can monitor all you like but you can not control the amount of dividends declared and paid nor where the equity closes today or tomorrow.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Dividend Misunderstandings & Only Spend Return

Post by DonCamillo » Wed Jul 12, 2017 6:53 am

Grt2bOutdoors wrote:
DonCamillo wrote:I like dividends on a (relatively small) portion of my investments.

I used to collect dividend paying stocks.
It's likely you bought those equities when they were considered small or midcaps, not the large caps they are now. Also likely you purchased them at much lower prices than today. Anyone purchasing individual equities has better be aware of all the risks, you can monitor all you like but you can not control the amount of dividends declared and paid nor where the equity closes today or tomorrow.
They were already Megacaps, but most of them have more than doubled in price since I bought them. Most of my purchases were yielding about 4% when I was collecting dividend paying stocks, not the typical 2% today. I was concentrating mainly on dividend champions with a history of increasing dividends. While I agree that the market seems to have high valuations today, I also agree with the Bogleheads principle that "Time in the market is more important than timing the market."
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Re: Dividend Misunderstandings & Only Spend Return

Post by DonCamillo » Wed Jul 12, 2017 7:09 am

snarlyjack wrote:I know...never say never...

Last night I went through the stock holding of VHDYX.
These big blue chip stocks have been around for years &
are going to be around for years to come. They employ
millions of people. Now they might have their up & downs
but I don't see them going anywhere. VHDYX is a pretty
sweet little fund. Vanguard did a excellent job with it!

I don't see a reason why a person could not live off of that fund
for years to come.
I used to work for AT&T. It was then known as a Widow's and Orphan's stock because it had been steadily paying dividends for over 100 years. During the time I worked for them, they got most of their income from long distance charges, and their revenue per minute from long distance went from about 25 cents per minute to zero. The stock collapsed, the company went from 1 million employees to 20,000, and the company was sold for a pittance to a former "Baby Bell" that had been spun off from AT&T in 1984. I took early retirement and watched stock options that were millions of dollars "in the money" go to nothing before I was qualified to execute them.

The Fortune 500 is a very dynamic group. Most of the companies in that group when I started investing no longer exist. That may be disguised, as it is in the case of AT&T, but the company I used to work for is only a tiny portion of the company that bought it.

I will admit that VHDYX is also dynamic, adding and losing companies all the time. But "Past performance is no guarantee of future returns."
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Re: Dividend Misunderstandings & Only Spend Return

Post by minimalistmarc » Wed Jul 12, 2017 7:15 am

I hate the way it's called "Dividend INCOME".

It's not called income if you take cash out of your bank account.

Dividends should be called something else so people stop being confused about them.

Dividend lovers seem to be completely obsessed with the word INCOME, almost like it is a drug to them.

I have seen people say they don't care that the share value has plummeted by 50% as their dividend income has doubled (obviously just before it is about to be cut or taken away completely).

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Re: Dividend Misunderstandings & Only Spend Return

Post by saltycaper » Wed Jul 12, 2017 7:23 am

That this meta thread started by probing potential reasons behind dividend misunderstandings and devolved into another debate over the merits of dividend investing shows just how deep these misunderstandings may run.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

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Re: Dividend Misunderstandings & Only Spend Return

Post by Grt2bOutdoors » Wed Jul 12, 2017 8:04 am

DonCamillo wrote:
Grt2bOutdoors wrote:
DonCamillo wrote:I like dividends on a (relatively small) portion of my investments.

I used to collect dividend paying stocks.
It's likely you bought those equities when they were considered small or midcaps, not the large caps they are now. Also likely you purchased them at much lower prices than today. Anyone purchasing individual equities has better be aware of all the risks, you can monitor all you like but you can not control the amount of dividends declared and paid nor where the equity closes today or tomorrow.
They were already Megacaps, but most of them have more than doubled in price since I bought them. Most of my purchases were yielding about 4% when I was collecting dividend paying stocks, not the typical 2% today. I was concentrating mainly on dividend champions with a history of increasing dividends. While I agree that the market seems to have high valuations today, I also agree with the Bogleheads principle that "Time in the market is more important than timing the market."
There are a few close to 4%'ers out there that are dividend champions, but that requires one to have a contrarian view and be able to hold, those 4%'ers could easily be 5%'ers too, if conditions were right. Full disclosure - I hold a large cap value, dividend portfolio most of which have more than doubled, yes time in the market, but with individual equities as you alluded before, one must tend to them much like you tend to a garden to avoid it being overrun by weeds. The key is to understand which is the weed and which is the fruit bearing plant. Not all fruit bearing plants are like, some are more productive than others and some just wither away when they've reached the end of their productive lifespan.
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Re: Dividend Misunderstandings & Only Spend Return

Post by pkcrafter » Wed Jul 12, 2017 8:26 am

pj wrote:
As an illustration, how much should I bid at auction for a box with a used iPhone in it? How much for the very same box with the very same used iPhone if everybody knows there's also a ten dollar bill in the box?
This is not correct. The example would work like this: there is an iphone in the box plus a $10 component removed from that iphone in the box. You need the iphone plus the component to get a total iphone. :happy

In earlier days, before mutual funds and computers, investors would take a dividend from selected stocks for income of around 5%, and I suppose the idea was passed down through generations. In Benjamin Graham's day, yes, it was a good idea because it was easier and cheaper than selling stocks . But today, with mutual funds and the the ability to sell when necessary, taking divys doesn't make a lot of sense. For one thing, if you take divys you can't control when to make withdrawals. You would not want to take divys when the market is down. Far better to let the divys buy more shares and then make a withdrawal at an optimal time.

Dividends are not free money

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When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Dividend Misunderstandings & Only Spend Return

Post by House Blend » Wed Jul 12, 2017 9:27 am

As a thought experiment, I wonder how much investor behavior would be affected if tax laws were changed so that stock dividends collected by funds did not have to be distributed to shareholders, and could remain baked into share price as unrealized capital gains.

Of course it has no chance of happening as it would result in an immediate short term decrease in tax revenue. But it would be a huge advantage for investors and make stocks-in-taxable vastly more tax-efficient. It would also end the kvetching about buying a dividend or whether to auto-reinvest.

But I suspect the most notable effect would be a huge flow out of funds and into individual dividend-paying stocks. :oops:

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Re: Dividend Misunderstandings & Only Spend Return

Post by dbr » Wed Jul 12, 2017 9:45 am

House Blend wrote:As a thought experiment, I wonder how much investor behavior would be affected if tax laws were changed so that stock dividends collected by funds did not have to be distributed to shareholders, and could remain baked into share price as unrealized capital gains.

Of course it has no chance of happening as it would result in an immediate short term decrease in tax revenue. But it would be a huge advantage for investors and make stocks-in-taxable vastly more tax-efficient. It would also end the kvetching about buying a dividend or whether to auto-reinvest.

But I suspect the most notable effect would be a huge flow out of funds and into individual dividend-paying stocks. :oops:
Such funds exist in some countries, I think notably the UK, at least as I understand it.

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Re: Dividend Misunderstandings & Only Spend Return

Post by TheDuker » Wed Jul 12, 2017 11:14 am

minimalistmarc wrote:Dividend lovers seem to be completely obsessed with the word INCOME, almost like it is a drug to them.
Yes, dividend enthusiasts are more concerned with the number of shares than the value of those shares. During accumulation, they love to reinvest their dividends and see the number of shares climb. Then during distribution, they love to cash their dividend checks and see the number of shares remain the same.

The dividend pitch can be pretty compelling, it goes something like: "Those total return guys with their backtests and monte carlo sims keep telling me if I do everything right, there's a 90% chance I won't run out of money. That's not good enough for me! Wouldn't you rather have a stable and reliable income stream built from dividends? If your dividends cover your expenses, there's a 100% chance it will last forever and you'll never have to draw down your investments." This is of course the premise referenced in the OP.

Another core belief among dividend lovers seems to be that the dividend itself is an indicator of a company that's safe, stable, and healthy.

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Re: Dividend Misunderstandings & Only Spend Return

Post by dbr » Wed Jul 12, 2017 2:07 pm

TheDuker wrote:
minimalistmarc wrote:Dividend lovers seem to be completely obsessed with the word INCOME, almost like it is a drug to them.
Yes, dividend enthusiasts are more concerned with the number of shares than the value of those shares. During accumulation, they love to reinvest their dividends and see the number of shares climb. Then during distribution, they love to cash their dividend checks and see the number of shares remain the same.

The dividend pitch can be pretty compelling, it goes something like: "Those total return guys with their backtests and monte carlo sims keep telling me if I do everything right, there's a 90% chance I won't run out of money. That's not good enough for me! Wouldn't you rather have a stable and reliable income stream built from dividends? If your dividends cover your expenses, there's a 100% chance it will last forever and you'll never have to draw down your investments." This is of course the premise referenced in the OP.
Circular arguments are always going to be compelling.

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Re: Dividend Misunderstandings & Only Spend Return

Post by Thesaints » Wed Jul 12, 2017 3:33 pm

dbr wrote:
House Blend wrote:As a thought experiment, I wonder how much investor behavior would be affected if tax laws were changed so that stock dividends collected by funds did not have to be distributed to shareholders, and could remain baked into share price as unrealized capital gains.

Of course it has no chance of happening as it would result in an immediate short term decrease in tax revenue. But it would be a huge advantage for investors and make stocks-in-taxable vastly more tax-efficient. It would also end the kvetching about buying a dividend or whether to auto-reinvest.

But I suspect the most notable effect would be a huge flow out of funds and into individual dividend-paying stocks. :oops:
Such funds exist in some countries, I think notably the UK, at least as I understand it.
Yep. "Accumulation" and "Distribution", often even ETF's come in the two flavours in Europe.

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Re: Dividend Misunderstandings & Only Spend Return

Post by Phineas J. Whoopee » Sat Jul 15, 2017 8:30 pm

minimalistmarc wrote:I hate the way it's called "Dividend INCOME".

It's not called income if you take cash out of your bank account.

Dividends should be called something else so people stop being confused about them.

...
Setting aside US income tax law, I agree with you. If I take assets out of my left front pocket and put them into my right, even if it was a taxable event, was it legitimately income? Maybe yes. I bought the assets with what then was income, and they fluctuated in value as financial assets do. Apart from income tax it was income, but is it now income?

I concede in this instance I'm doing what I have often cautioned against, that is to say applying colloquial meanings of words to terms of art.

Is it income?

Should we think of it as if it's income?

Lest the FBI, or for that matter the FSB, get all angry, I am entirely in favor of every individual and every business paying their income taxes in full, and I personally always do.

PJW

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Re: Dividend Misunderstandings & Only Spend Return

Post by gilgamesh » Sun Jul 16, 2017 8:05 am

goingup wrote:Our retirement income streams will include rents, royalties and dividends. We like income streams and there is no misunderstanding. Sure, we can and will sell shares to fund retirement as well. I see no problem with appreciating dividends as part of a total return strategy.

I think the misunderstanding comes from people here who think anyone who doesn't hold their nose when cashing a dividend check is either misguided or daft.
Really?...Does snarlyjack just a few posts below has it right? Just curious what your thoughts are?

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