Some opinions and questions:
I recognize that dividend payments are simply part of total return, and that it to first order it shouldn't matter mathematically whether the total return is from dividends or buybacks/capital gains. I further recognize that an investor should not chase yield and should remain diversified by investing broadly and avoiding overconcentration in dividend stocks. (This goes both ways, too - one shouldn't overconcentrate in zero-dividend growth stocks). I also recognize that in a taxable account, dividends generate a moderate tax drag. The excess tax drag in the accumulation phase would probably be as follows:
-Hypothetical Dividend Fund has a 1% higher yield than blend fund (very rough estimate)
-20% of this 1% yield goes to taxes (rough estimate strongly dependent on state and local taxes)
-So 20% of the 1% higher yield is gives a 0.2% tax drag - compounded during all of accumulation.
-In this rough model, the tax drag is 20 basis points in taxable during accumulation when reinvesting dividends. If one is choosing between spending the dividends and spending the capital gains, the drag at that point would be far less as sales of highly appreciated stock generate substantial capital gains. If the stock has appreciated by 95% after decades of investment and tax loss harvesting and you are choosing between selling those highly appreciated shares and paying those capital gains taxes versus paying taxes on the dividends, then wouldn't there be relatively little difference at that point as only 5% of the share sale proceeds are untaxed?
A needless 20 basis point tax drag compounded during accumulation is substantial. It compounds for decades and reduces growth substantially. It probably isn't completely catastrophic, though, in my opinion. If one has 10% of their portfolio in a diversified dividend index fund,then the drag on the whole portfolio is 1/10th of that 20 basis points, or 2 basis points. Is it possible that an investor could rationally decide to pay this tax drag for the convenience and behavioral discipline of a "spend the dividend" strategy, and/or for the weak value tilt? It's roughly similar in my opinion to choosing to pay a somewhat higher ER to one fund shop vs another for otherwise similar funds (for, say, better customer service), or choosing to pay the added volatility drag due to uncompensated currency risk in Total World for the convenience of having a single core stock fund.
Phineas J. Whoopee wrote: ↑
Wed Oct 11, 2017 5:43 pm
There is no negativity, except in response to posters who claim dividends are a superior
source of return. They are not, but that doesn't mean any serious poster here thinks they are an inferior
I feel that dividends are a "better" source of return, but only to the extent that I feel that credit/debit cards are a superior way of paying for something vs mailing a check. With the plastic vs check issue, the payment gets made either way... it doesn't really matter so I don't feel too strongly either way. If someone wants a check mailed, I mail the check (while grumbling about how much easier it would be to use a visa/mastercard), but I don't get all that upset. I recognize that with debit/credit cards, there is a processing fee for the merchant that often gets passed on to the customer, but I am willing to pay that cost for the speed, convenience, fraud protection, and transparency of using a card - but I really don't care that much.
Similarly, I feel that dividends are "better" because they are a more direct, transparent, and traditional method of returning value to shareholders - but if a company wants to pay via buybacks instead, I am fine with that.
I don't feel that anyone has responded to some of my views regarding the convenience aspect of a dividend withdrawal strategy:
A "spend the dividends" strategy can be much more convenient to operate than a strategy involving routine stock sales. Processing a sale can be very difficult, costly, and time-consuming especially if reinvestment has occurred for many decades and there are hundreds of share lots. It is a difficult, manual process that may in some cases involve substantial transaction fees, looking up cost basis records, dealing with a 1099-B, mailing in stock certificates, etc? Does the convenience of a dividend strategy outweigh the substantial costs of the tax drag? Or can you set up regular sales from stocks to realize capital gains using Spec ID?
I feel that the convenience argument is one of the stronger arguments for dividends during a withdrawal phase. Any thoughts?